 Good Morning and welcome to the 35th meeting of the local government and communities committee in 2018. Can I remind everyone present to turn off their mobile phones? As meeting papers are provided in digit format, tablets may be used by members during the meeting. The committee is invited to consider and agree whether to take agenda item 3 and 4 on the consideration of evidence heard today in relation to the committee's budget scrutiny for 2019-20, and the committee's work programme and private. Are we all agreed? The committee will take evidence today on the accounts commission's recently published financial overview report to help us in our consideration of the Scottish Government's budget for 2019-20. I welcome Graham Sharpe, chair and Fraser McKinley, controller of audit accounts commission. Brian Howard, audit director and Ashley Magity, senior auditor audit Scotland. I invite Graham Sharpe to make a brief opening statement. Thank you, convener. On behalf of the accounts commission, I welcome the opportunity to discuss our 2017-18 local government financial overview report with the committee. Our findings are similar to last year. Scotland's councils have continued to manage their budgets well while facing an increasingly complex range of challenges and continuing pressure on finances. Revenue funding to councils reduced in 2017-18 by 2.3 per cent in real and 0.6 per cent in cash terms. However, this reduction was largely offset by increases in council tax and fees and charges. Councils also used savings and reserves to manage budgeted funding gaps of £0.5 billion or 4 per cent of net expenditure. The impact across services varies, with increased spending in education and social work balanced by reductions in other services. Councils are having to make hard choices about services. The position varies from council to council, but overall there is clearly a continuing need to make major changes in the way services are provided. Last year, we highlighted the risk for some councils in planning to use significant amounts of their reserves to manage funding gaps. I am pleased that this year, although overall reserves have continued to reduce, no council is planning to use its reserves at a level that risks its financial sustainability in the next two to three years. Scottish Government revenue funding for 2018-19 increased by 0.2 per cent in real terms, and councils expect to manage smaller funding gaps over 2018-19 of £0.3 billion. However, the Scottish Government's five-year financial strategy, published in May this year, identifies greater future uncertainty and indicates likely further reductions in funding. One of the other most significant challenges for councils is financial issues associated with integration joint boards. A report notes that, while funding to IJBs increased in 2017-18 by 3 per cent, including additional funding from the NHS, the majority of IJBs have underlying financial sustainability issues. Without year-end support from both the NHS and council partners, 20 of the 30 IJBs would have reported deficits. Last month, we published a report on progress with health and social care integration. That highlighted areas for improvement, including financial management and financial planning. My colleagues and I are happy to answer questions. Can I start off by changing the profile of local government funding, revenue funding, the decreasing settlement from the Scottish Government in the context of the increased income from local taxation fees and charges? Given that we hear regularly that local government is under pressure, as I accept it all, the Scottish Government and other areas are as well. In your own report, you say that the net result is basically a flat line, that there is no difference. Could you explain it as A, what this changing profile means? Does it mean that there is less money going into local government in total, or does it mean that it is just less easy to see? First, it is true to say that there is continuing and increasing pressure on finances as the main fund or being the Scottish Government's funding reduces. Currently, it is about 55 per cent adding the NDR and direct funding. Any organisation that is faced with that will, among other things, look at options to replace that gap. In the case of councils, the options that they would have would be local taxation, fees and charges, and commercial activities, which, as we have reported to the committee in the past, is less prevalent in Scotland than it is in some parts of England. This year, or 2017-18, it is a flat line in terms of funding, but the balance of how that funding is made up has altered. Given that your last comment about the charging of local authorities, would you give then that there is more scope to close that gap further or even to make sure that there is more money available to local authorities? I think that the scope for taking advantage of the different theoretical options open is a policy decision for local councils dependent on their particular circumstances. What we see looking at 2018-19 is that everyone is going for a maximum council tax and they are looking at other ways of raising funds. Clearly, that will continue to be an option to what extent it continues to provide additional funding. I think that that is something that we would have to see, but colleagues may have a view. The other thing about particularly charges for services—we touch on this on page 15 in the report—is the real variation that we can see across councils in terms of what they charge for and how much they charge for some of those services. We give some examples that are so. In terms of your original question about what the impact is, some of those things have a direct impact on the people who need to use those services. Throughout the report, you will see that, down the right hand column, we have put in some questions, particularly for councillors, who are designed to ensure that councillors are asking the right kinds of questions when it comes to budget time. Those kinds of decisions around fees and charges are being made. We need to be sure that councillors need to satisfy themselves that they are making these decisions with a full understanding of what the impact will be on their communities. I am going to move on to another question, but just on that itself, there is a recognition here that the differential is down to local authorities. This has nothing to do with the Government. The Government has given them the right and the ability to make these charges as they feel appropriate. It is a case of that. The councils then have to get that information out to their own residents. I would say that it is still relatively small in the context of overall local government funding. While some of the increases that we use in paragraph 26 are significant, there is a very small amount in the grand scheme of things. As members will know, there continues to be quite a lot of debate about the way in which local government is financed and the extent to which it is financed locally, through a whole range of local taxes or the extent to which it continues to rely on central government grant. The only thing that I would add to that is that there is quite a wide variation in the sorts of things and the level of fees that individual councils charge for and over time it may be that that begins to flatten out, but that would be speculation. On paragraph 26, you have analysed 16 different types of charges that councils are putting up, presumably. I was struck by the first two, the purchase of a grave, a lair and an adult burial. I wonder if there is any evidence of councils putting up charges on things that they might see as easy hits. I am less likely to be controversial. When councils consider what to do, they look at a number of different factors. Certainly one of them will be and ought to be the impact on the public. Another factor will be that they will look at what other councils have charged for and how they compare. I do not think that we start with a level playing field there, as I referred to at the end of the last question. There may be situations where councils could introduce or significantly increase charges just to bring them up to the levels that other councils were charging at, but they were not. That is why I said that there might be a sort of flattening out as people see what else is being charged for and bring those into line. That is one factor. Members will know better than we do from their own communities. I am sure that some of those things can be very controversial. When I live in Eastlothian and car parking at beaches, it becomes a very big local issue. As the chair said, those are the kinds of judgments that local politicians are needing to make. They are needing to make them more often, I think, for sure. In terms of benchmarking, is there evidence that the benchmarking tools that were developed through COSLA and others are being used when looking at budgets and looking at what different authorities are doing and trying to achieve best practice? In terms of the local government benchmarking framework, that is used by all councils. Indeed, their position is published as a matter of course, and we require them to do that. I was making a different point in terms of charging for services, where that is not necessarily picked up in an individual benchmark test, but it is an exercise that individual councils will go through when they are considering their own fees. They will look at what other councils are doing, so that there will be a bespoke benchmarking, if you like. Brian, do you want to say something about that? I could probably add something just on both points on the fees and charges. Casting my mind back to this committee last year, I think that there was a point made when the spice briefing had come out last year that I think was described as a bit of a roller coaster in terms of the data around fees and charges. This year's report that we present to you is our attempt at providing more insight into that, and we would like to increase the work that we do around the insight in terms of fees and charges. We have picked a selection of fees and charges from quite a cross-range of things, and those are the ones that we have picked out as being the most marked in terms of changes. As we go forward, it would be more useful to give you a complete picture of the range of things that we are asking about and the increases. On the benchmarking information, we are going to issue a report in March about the benchmarking performance, which is significantly based on the improvement service benchmarking data. That will build on the analysis that we are able to bring to you about benchmarking of performance and the costs related to those. I would like to move on to your report on the overall increases in spending education and social work being offset by reductions in other services. Have you seen evidence of that significant? Have you given any advice or guidance into how local authorities could look at that? First of all, education and social work together are roughly 70 to 75 per cent of expenditure. If those areas do not see any reduction in spending and indeed see an increase, clearly you have a gearing effect on any global reduction on the remaining services. The figures taken from the Scottish Government's five-year look forward and some of the analysis that has been done on that where there is a projection that in the middle scenario it is a 9 per cent reduction over the five years in non-protected services, which would affect local government. You get that sort of gearing. It is down to councils to set their own priorities. Clearly, it is a whole mix of services. There are front-line services that the public see immediately—condition of roads, waste collection—but there are also services that the public do not necessarily see such as regulatory and inspection services planning, which nevertheless affect the quality of life in the longer term. It is for councils to balance that if they have protected areas that they just have to manage the balance according to their local conditions. Once again, that is the decision that local authorities have to make on their own. Andy, you have a couple of questions, I believe. In key message 3, in part 1, you talk about that there could be more transparency to ensure clarity about how funding distribution works. I take it that it refers to Exhibit 4 in paragraph 18 to 20. We have had discussions in this committee before about the transparency of budget figures, but we will wait and see how transparent they are. I am just wondering if you could clarify a little bit, but you said that in paragraph 18 the basis of the calculations are not publicly available. I presume that the calculations exist, the fact of them exist and they could be FOI-able or whatever, but you are noting that they are not published as such. I wonder if you could comment on the significance of Exhibit 4, which seems to me quite a very, very interesting little bit of analysis that you have done. In paragraph 15, when you say that the total amount of grant-aid expenditure has remained at £7.9 billion, I thought that grant-aid expenditure changed all the time, so maybe you can clarify that as well. I will, perhaps, actually to provide more detail in this. Dealing with the second part first, what we are saying is that the basis of the calculation was frozen in terms of the proportions of the elements of it. It is not the amount that is frozen, so the amount continues to increase, but it is not looked at anew each year. I think that the SPICE report in June this year commented that the share of total revenue funding that is distributed on the basis of relative need has decreased over time precisely because that formula has not been renewed for 10 years. That is one point. The second point on Exhibit 4, we have put that in for illustration to show that we can demonstrate a strong correlation with population and allocation of expenditure over councils. We are really unable to show that strong relationship in the case of deprivation, it is a medium-to-weak correlation. Therefore, it raises a question to the bodies that decide on the funding formula, i.e. the Scottish Government, as are you satisfied with the current arrangement? That is the question that we are raising, but I might be able to provide a little bit more background on the GIE. The GIE makes up part of what is called the updated service provision, which is called the one in the circular. That amount has stayed exactly the same since it was put in place in 2008. It is made up by the 89 indicators that we talk about, and that is very public in the green book, so you can work all that through and work out how it works. The £3.7 billion that we talk about in paragraph 18 is the bit that changes every year, and that is made up of historic ring fence grants, new policy commitments and additional funding. These are the bits that we say are not transparent. Some are based on the weightings that are already in the GIE, and some are individual methodologies that are decided by the policy team and then the SDG group that we mentioned in paragraph 20. That is the area that we say is less transparent. We have not seen sight of those. That is very helpful. I know that we should know all this stuff, but I find it still funny trouble with the funding formula. Since 2009, the total amount of GIE has remained at £7.9 million, and that is an accurate statement. That marries with your comment, Mr Sharp, that because that £7.9 billion has been frozen, the amount that is subject to a needs-based distribution has gotten less as a proportion of the total. On Exhibit 2, you talked about the revenue grant funding falling by 1 per cent in 2017-18 and then NDR 5.3 per cent on a smaller amount, but that leads to 2.3. Your Exhibit 1 shows the 55 per cent of what you call total revenue funding. Have you always presented NDR as part of Government funding, given that it is local government's own tax, although it is pooled and redistributed? Colleagues, you will have to help me on the history. The reason that we do that is because of the offset that what is guaranteed in the budget is, if you like, A plus B, not A or B, and A is the Government grant and B is the NDR. Yes, we have always presented it, and it is exactly for the reason that the chair says that if non-domestic rates income in a local area and a council area is less than anticipated, then that is made up through the revenue grant. We think that it is important to separate the two things out, but we think that it is reasonable to present it as a whole. Just to be clear, non-domestic rate is subject to the grantated expenditure calculations, or that part that is part of £7.9 billion. Is this where it gets quite complicated? Maybe you could write me a letter about it. We don't have a whole morning. Maybe we could have a seminar. We tried to simplify what we presented on the formula this year, because otherwise it can take over the report. You also make a comment in the report about the fact that some councils have complained that they had set their budget and then two days later they got the final settlement. Has that changed substantially over the years of devolution? We have always been following the autumn statement and we have always been crashing into local government's own budget process. I think that it was mainly the adjustment, but Fraser, do you… So, again, as members will know better than we do, the timing is always such that they are pretty close. Obviously, we will get the budget this afternoon at the high level, and then there is a process until we get into early spring when the final position is known. Certainly, councils are used to making those kind of adjustments at relatively late stages. I think that the main difference this year, if that is what the chair is referring to, was that £35 million that we mentioned in Exhibit 2, which did come very late in the day. In a sense, it was in relative terms a relatively small amount of money. Equally, for some councils, it still makes a difference individually, but no, I think that the general budget cycle, I think, is unchanged. I think that what we would say is that councils now, we think, are much, much better, both at medium and long-term financial planning, and one of the impacts of that is that, in a sense, the budget cycle does not really stop. I think that if you were to look back five years, the budget process happened between now and February when they had to set a budget. Increasingly now councils are doing that on an on-going basis. From that perspective, it is less of an issue because they are much better prepared, I think, with things like scenario planning and modelling to make those adjustments when they come in in January, February time. They are better placed now to deal with those changes than they would have been in the past. I would just add that, in the two years that I mentioned, the report 1 is 17, 18, and later on we talked about 18, 19. The lateness of the budget proposals was an issue raised by many councils with us. Probably what has changed is, I cannot really say whether that was the case in previous years, but what has probably changed is that, with reducing resources available, it probably makes the decision-making process a bit more torturous for councils in a shorter time. I think that that is probably what feels different in the last couple of years, perhaps. On paragraph 36, you introduced us to Northamptonshire County Council. I am just wondering why you are talking about an English council. Obviously, it is an example of a council that is having to use almost all of its general fund and reserves, but maybe you could have said that it is the only reason. Secondly, where stands Scottish local government financially in comparison to English local government? One of the purposes that we had in using Northampton was just to illustrate some of the differences, because it is not straightforward to compare Scottish local authorities with English for a number of reasons. The structure is different. We have three different tiers of local government in England. We have 32 unitary authorities in Scotland. They do different things, and the funding is different. We showed that with Northampton. As we have just discussed, 55 per cent of funding coming from central government in Scotland, for example, we showed Northampton 17 per cent. Half of Northampton's funding coming from fees and charges is 25 per cent overall in Scotland. The funding structure is quite different. Therefore, if you say that there is an X per cent reduction in central government funding in Scotland, which compares with a Y per cent reduction in England, you are not comparing apples with apples, because the significance of the different funding streams is different. There are significant funding streams. What is clear, as reported just last week, is that there has been a 60 per cent reduction in UK government funding to local authorities in England. In 50 per cent of our local authorities in England now receive zero grant funding, which is why there are crisis places in Northampton, and even in Surrey and other places. I want to look more at the issue that you touched on in your opening, Mr Sharpe. You said that there are major changes in the way that services are provided. If we look at paragraph 2, it says here that only 13 per cent of income, £2.3 billion, was generated through council tax, but 25 per cent, £4.3 billion through fees, charges and grants credits. I wonder what kind of innovative and imaginative solutions are we seeing, either in Scotland or in the south of the border, to help local authorities to improve the funding? We have already seen how that paragraph shows that, in that year, there was a £328 million increase in income from those sources. What are local authorities doing now that is more innovative and imaginative, and what can they do, possibly learning from the situation south of the border? In terms of what they can do, there is a whole set of things on the service side. That is where we talk about transformation and choices on priorities. We will look at that more in our spring report, which will focus on the challenges and service side. The report is more about the financing side. In terms of financing, as we have been discussing, the structure of financing is rather different in England. One clear difference that we have referred to before at the committee is the degree of commercial income in England, for example, where there are councils that have significant commercial income in England, and that tends not to be the case in Scotland, though clearly it will be one of the options that councils look at. Whether there is the scope to be able to do that to the same degree as there is in some parts of England is an open question. I invite colleagues to give any particular examples. I think that it all depends on the risk appetite of the individual councils. One of the issues possibly with commercialisation is that it increases the risk exposure of councils. We are seeing some extent of that happening. The examples that I would give are not particularly within the report. It is to do with some of the Scottish pension funds that are moving into infrastructure projects schemes. We are seeing it around the edges. The one council that we probably note is doing most in this area, perhaps, so that I am aware of is Aberdeen City in terms of its Martial Square investments. That means that, as we say in the report, taking on additional borrowing, with the expectation that it will produce investment returns over time, with the benefit of having a hindsight in the future, we will see what success that has. However, it does increase the risk exposure of a council of exposing itself to commercial returns as a major part of its budget process. The figures seem to show that Aberdeen is at the second highest debt ratio of any local authority. In North Ayrshire, where I am in MSP last year, the local authority voted 17 votes to 16 to reject a commercial proposal that would have meant that the purchase is at a cost of some £55 million of a 47-year-old retail centre and then £17 million to refurbish. It seems to have happened to retail in the last year, so one wonders how sensible some of those ideas are. I am just wondering if there are any that have been particularly successful that you think can be implemented here in Scotland to the kind of ideas at least. Also, Mr Shack, we talked about choices and priorities, but surely the local government a lot of it is not about choices. You have to provide social work provision, you have to provide education. The room for manoeuvre in local authorities, I would suggest, has been diminishing over the years and statutory provision is becoming a higher and higher proportion, so that is why I am looking to see what kind of ideas local government can perhaps examine to try to improve their funding situation. In terms of choices being limited, I think that was illustrated by the 75 per cent expenditure being on social care and education, but there are still choices that will vary according to local conditions across councils on the remainder, and the remainder is still important in terms of balancing budgets and the quality of service provided. I think that the whole question of statutory provision is a really interesting one, Mr Gibson, because statutory provisions for a lot of council services are pretty broadly drawn, so you have to provide an education service. There are loads of different ways that you can do that, to do with the length of the school day and all those kinds of things. For me, there are two different kinds of innovation that are important to reflect on. One is primarily, as the chair said, about improving service delivery, which may also impact on efficiency. I think that some of the school's building programmes that you have seen in Ayrshire and other places have been genuinely transformative for local communities when you see some of the new campuses that are being built in some communities across Scotland, making a huge difference. That is not just about education, but important community facilities. The commercialisation thing is where Scotland is a bit behind, although I use that phrase carefully, because I do not think that anyone would want to see some of the stuff that we have seen in England, where very small councils have been buying out-of-area shopping centres for purely commercial purposes. SIPFA in the UK is currently consulting on a new code that says that we do not really think that that is what borrowing public money is for. There is a philosophical question about whether that is a reasonable thing to do. It may be quite different if there is a shopping centre in the middle of your town that the council thinks that they can invest in and transform as part of a wider regeneration activity. That is one thing. As Brian said, there is a risk-apatite thing. As auditors, what we are interested in, as Brian mentioned, is Aberdeen City, as well as the Marshall Square. Obviously, Aberdeen City is the one council in Scotland that has gone to the markets. It had a bond issue to support infrastructure investment, including a new Aberdeen conference centre, which is a new and innovative thing. Again, as the chair said, what we are interested in is not whether that is a good decision or a bad decision, but that is for the council to decide. What is absolutely critical is that councillors, in particular, when they are making that decision, fully understand the risks and opportunities associated with those decisions, because they are becoming increasingly complicated and complex financial transactions, so it is doubly important that councillors really understand what they are getting themselves into. Can I just follow that up? Is there much best practice in Scottish local authorities, as you have banged on a bit for many years, in this particular area, in terms of sharing advice and information? One thing that people get upset about is when they see large amounts of money being spent, for example, on external consultants by local authorities to advise them on those issues. Is there a strengthening of knowledge and understanding in those issues? Is there a sharing of what has went well and what has went wrong in order for local authorities to reduce their risk but, at the same time, can become more innovative and can come up with new ideas to generate additional incomes? The short answer is yes. We would always like to see more of it, but I think that the key things are certainly around the finance area. Some of the things that we have been talking about, the SIPFA directorates of finance group, is pretty active. That is quite a good network. Appsay, the Association of Public Service Excellence, are a very good network UK-wide for exactly some of this stuff. They have done a lot of work around commercialisation. The commercialisation board was most recently chaired by a councillor in Dumfries and Galloway, as it happens. It is quite well plugged in there. The improvement service plays an important role. I think that the challenge is the way in which you can learn, and this is where it is a challenge, because there is something about the scale for us, so there are pockets of good practice that people know about. The trick then is how you take that into your place to make it work for your set of circumstances in a way that actually begins to make a difference at scale at the moment. Some of this stuff is at the margins, and I do have a bit of a concern. I suppose that, while education and social work are in financial terms being relatively well protected, that does not mean that they should be free from change and transformation. There are still ways of delivering those important services differently, and I think that we need to be careful that we do not get sucked into a conversation that says that they need to be left alone, and therefore we can only look at the other stuff. I do not think that that is going to, you know, instinctively, cut it. I think that there is back fees and charges. A year ago, 24 of the councils engaged in a benchmarking exercise across fees and charges, in the example, so that kind of work does go on. I just want to see them increasing above rate of inflation year on year. They obviously want to see things done a bit differently, but I will just stitch on one more thing, if that is okay, convener. In paragraph 67, I mentioned, obviously, that I represent a constituency in North Ayrshire, you have said here that the Auditor for North Ayrshire IGB highlighted concerns that, and I quote in the medium-term, the IGB is faced with an extremely challenging financial position, and that is well known locally. In line with many other IGBs, it has not achieved short-term financial balance but it has not been deficit funded by its partners. In the Exhibit 14, you can see that it is the only local authority that has a negative reserve, some £5.8 million. You have mentioned three issues that are identified with financial management of the IGBs, including the late agreement of budgets, poor financial monitoring, due to delays and inaccuracies during the year, and projected outcomes forecast during the last quarter of 2017. We are very different from what was actually achieved. What has been the issue in North Ayrshire IGB, which makes it different from all the other local authorities in terms of that, because £5.8 million for a local authority with 135,000 people has got a significant amount? I will ask colleagues to talk about the specifics in a moment, but what we have tried to reflect is looking at North Ayrshire from two perspectives. On the one hand, the auditor of the IGB is clearly looking at that as an individual standalone entity, and they rightly said that there is this deficit position that is concerning. At the same time, if you look at North Ayrshire as an operating IGB, is it that different from the other 19 that are in deficit but they are not showing deficit in their accounts because they had additional funding from their partners? That is really the difference between the two. In terms of why it is that way, I do not know if we can… I will not be able to say why the detail. You are making the link between exhibit 14 and the points at 70 is a good point for us to pick up. What is different, as Graham has said, is that the main issue is that, in common with many others, they are overspending in year. What is the difference is that, for the others, that position is being squared off in the year, whereas for North Ayrshire Council, the hosts and partner bodies have taken the view that the IGB needs to redress that deficit position in itself over the coming years. Really, the only way it can do that is by reducing the funding that it gives to its partner bodies in future years to make good that deficit. That is the difference, I think. It is just the difference in the approach by the host bodies into dealing with the deficit that has occurred within the IGB. Would it not be better to have a standard approach so that we can see much more clearly? It looks if North Ayrshire stands out in an actual fact. Given your explanation, it is perhaps not such a stand out, as it seems from exhibit 14. That is the sense that we are trying to get across and saying that there are two ways to look at it, but the fact remains that it is a legal entity and that is what the account show, and it exists as a fact. We have to record that, and then we are trying to give a bit of context around that. I think that there is a bit more explanation, but it has been quite useful there because then the committee could see that there are other local IGBs that are also in real difficulty in terms of their funding and their service delivery. Just picking up where we left off with the North Ayrshire IGB, is it not the case? When I saw that a number of weeks ago in North Ayrshire IGB, I thought that it was a more transparent way of reporting. One of the issues that comes up time and again when you speak to local councillors is that they think that there is not a great deal of transparency around the whole funding of the IGBs. Is that not something that you should be looking at in terms of, if this is one way of reporting it, and I agree with Kenny that this is probably the most realistic or more transparent way? Is that not something that you should be making recommendations on? I will start on that, so yes, and we are. One of the reasons that we included more information on IGBs in this report than we have done in previous reports is to respond to exactly that challenge. I think that lots of people, such as your colleagues in the Health and Sport Committee among others, have said that there is a real lack of transparency around how IGB finances work, which is hugely significant because they are responsible for over £8 billion of public money. Let's not forget. The bit of the top of the page 29 is where we have tried to demonstrate, having done some analysis, that 20 out of the 30 IGBs would have reported deficits had the partner bodies not done something about it in the year. That is new information that we are putting into the public domain for exactly that reason. As the chair has said, it is also the case that North Ayrshire presents it in a particular way. You could argue that it is more transparent. From a selfish audit point of view, and trying to pull together this report, consistency would be great for us. It would make our lives a lot easier, but the reality is that there are 30 individual organisations with critically 30 different agreements and integration schemes that determine how you manage that kind of stuff. We will absolutely continue to bang the drum for more transparency and try to bring that in the reports both locally and in the work that Brian and his colleagues do in all the IGBs and also when we report nationally on integration. I just add that the point that Fraser made about them, them all having different agreements, not only is what each IGB does subject to its local arrangement, but its funding between NHS and the council is also subject to its particular local agreement, and they vary across the country as well. I can briefly touch on a couple of other points. We talked about the distribution mechanisms. You mentioned Aberdeen Council. The Aberdeen Council claims that they get a really raw deal out of the distribution factor. If you were looking more at waiting on poverty and deprivation, you would say that Glasgow gets a fairly raw deal compared to some. Is that not part of the problem that the local authorities among themselves, because there would be so many winners and losers depending on how you do that, is not in a position to come up with a look again at redistributing the finances? The Scottish Government does not have the political will either, but that does not mean that we should continue to operate under a distribution system that is not taking account of modern Scotland. Where does that leave us? On the same point of distribution, the £3.5 billion that is now coming in through a separate fund, in fact, you say that the methodologies are not publicly available and should be more transparent in terms of how that £3.5 billion is being distributed. Increasingly, we have seen more money going into local authorities through different methods. That surely cannot be allowed to continue. That is not transparent. I am not entirely clear about the question in that, but in terms of what we have said in the report, we recognise that, while it is a zero-sum game and if you increase money to one local authority, it means that money goes down for other local authorities, that is a challenging environment to make adjustments. That does not mean that we should not still pose the question that are you satisfied that the existing formula is actually meeting your objectives, given what you said that those are to both the Scottish Government and COSLA. It is for them to then look at the formula and the effect that it has and decide whether they are satisfied in the circumstances. We would not have a view on that. We absolutely recognise the challenges with this, Mr Rowley. We know that it is not a straightforward thing. The commission dipped its toe in the water on this topic last year, and we are dipping a slightly bigger toe this year. As I said last year, our point is a fairly simple one. Fundamentally, the thing has not changed in the past 10 years. It seems to us reasonable to ask a question about whether it is there for still fit for purpose, because the world has changed so much in the past 10 years. You also mentioned the point that it also seemed to me when we were here last year, that if increasingly there are different mechanisms needing to be created for a bigger proportion of the money, that does raise a question about the core funding formula. Our job is to raise some of those questions. As you say, it is for the Government and COSLA to consider whether and how it takes that forward. I am sorry that I did not mean to interrupt you, but I am just noticing the time that we have a lot to go through, so can we make sure that we do not spend too much time on one issue and that we do not need everybody to answer that? You had a clear policy direction coming through the late Campbell Christy, which headed up a commission that talked about preventative spend. You then had clear policy directives coming out of the Scottish Government and the question that you joined up with. However, if the funding is not being targeted to fit with that policy objective, then it is no wonder that it is not successful. Can I finally ask whether local government funding has reduced at a faster rate than other areas of the Scottish public sector? That is a very clear statement. The Scottish Government tends to disagree with that, and we would argue that local government has had its fair share. The public then end up confused us to who is saying what. Has local government maintained a fair share of Scottish public funding, or has it not? What we are reporting on is the numbers. The numbers are quite clear. I think that our figures are consistent with the SPICE numbers as well. We reported over the four-year period that local government funding reduced in real terms by 6.92 per cent compared to the Scottish Government funding in general of 1.65 per cent. That is consistent with the SPICE figures. In terms of making judgments about what is fair, that really comes down to policy and is not our area. That is clear. Just for clarity, does that figure include the money that they raise from extra sources? Or is that just the Government's funding of local authorities? Sorry, have you... The money that you are saying that funding has reduced at a faster rate, and is that the funding from central government? Yes. So it does not include the money that local authorities can raise in a way that, say, for example, the health service would not be able to raise? No, it does not, yes. That is just for clarity, thank you. Okay, thank you. That is clear, thank you. Eil Grim. Yes, thanks, convener. I will be very quick with my questions because I covered a bit of IJBs, which I was going to ask about. You mentioned transparency. We as a committee have covered this before. Every year, when we look at the budget, IJBs come up, and it all gets a bit murky, and it is sort of hard to figure out how much money is actually going into local government when we also have IJBs into the mix. Every year we say the same that we need more clarity, and you are essentially saying that as well. So what do you think needs to be done? Well, I think that takes us to the health and social care integration report, which we produced last month, where we set out a range of things that need to be done. Critically, in terms of financing, we need to address not just the money in IJBs, but also financial planning in IJBs and enable them to have medium-term financial plans to bring clarity and a support to transformation programmes that need that security of finance to be able to be carried through. Fraser, do you want to add anything on that? So it is. In terms of what needs to be done, there is something about the IJB bit of this in terms of medium and long-term financial planning. What we have tried to do in the last couple of years, Mr Simpson, is to bring some clarity. Exhibit 2, we have tried to separate out the different bits of funding. As you said, one of the big points of contention over the years has been what we are calling their health and social care funding via the NHS. The reason we have not included that as core local government funding is that it goes into the health budget in technical terms and then it is transferred to integration authorities. Government has said in the past that that therefore is money that goes to local government, and I am not sure that that is entirely clear, because what that money is actually spent on by an IJB may or may not be defined as local government services. It could be spent on a community mental health nurse, for example. That is why we think that it is absolutely legitimate to recognise that £357 million, because it is significant, but it is also why we show it as a separate line. That is maybe about as transparent as we can get on that front, and then it is for other people to decide whether it is part of the local government to spend or not, to be honest. However, as I said earlier, we will continue to bind the drum for increasing transparency both in terms of the settlement and how that has arrived at, and as the chair said, how the actual IJB funding is managed. The key thing for us is that it is not double counted. It is not counted in two places, both in the NHS and the local government. That is why we will treat it in our reports as one place. Exhibit 13 is our attempt, whether we like it or not, in trying to identify the flows and funding that go in and out of the IJB. It is quite a hard position to present. I hope that we have tried to make it as simple as possible in this, but I think that there is more we can do as we go forward in trying to present those funds flows that happen between the host bodies, the NHS and local government, the IJB and the funding that is given back to the NHS and the councils to provide services. I move on from IJBs. Can we talk about reserves? There is a bit of a section on that in the report. There is a wide variation in what councils are doing and how much reserves they have. If you look at Exhibit 7, usable reserves as a percentage of council annual revenue, the island authorities seem to do very well in Auckland and Shetland. If we go into the mainland, Renfrewshire has a high level of reserves all the way down to Aberdeenshire, which does not have as much. Is there an issue with that wide variation? Clearly, there is a variation. What we do with that is that we look at each council in its own context, because councils approach how they provide reserves on different bases. What matters to us is that the basis in which the reserves are calculated is consistent with their financial planning and has been thought through. It is not a rule of thumb or a number that just happens to drop out at the end of the calculation. There is a logic behind the level of reserves and different councils have approached that in different ways. That is judged by each auditor each year in terms of financial sustainability, looking at reserves, looking at debt and the financial planning. As we do our best value report round the councils, we see in more detail the different approaches that councils take. However, it is an area along with the medium-term financial planning approach that we have emphasised over the past few years. Generally, councils are improving significantly. Brian, you can… I can give a bit of a flavour for this on Exhibit 7. It comes down to very different approaches, very different treasury approaches within councils. At one end of the mainland councils, you have Renfrewshire, which will put money away into capital funds to spend over a number of years in the future. If you can trust that with someone like North Lanarkshire, they will have capital expenditure each year out of their in-year revenue reserves or they could resort to borrowing because they have quite a bit of borrowing headroom. There is a very different approach to reserves. That is what Exhibit 7 is really intended to highlight. It has very different reserve positions across councils. One of the things that we do consistently across the audits is that it builds on the Northamptonshire point earlier. We are very interested in the councils that are planning to use up their free general fund reserves over a period of time. In last year's report, we highlighted a few councils where it looks as if some councils might run out of their free general reserve within three years. In 1819, councils are not planning to use reserves in that same extent. Those three councils that we had concerns about in the previous report, we do not have concerns about now. They do not look as if they will run out within three years. That is a key point that will continue to monitor given the example of the Northamptonshire that we used earlier in the report. We are very keen on looking at reserves position, but it is quite a complicated picture across the councils because of very different approaches to how reserves are built up and used. I think that reserves and debt are very much linked. You have a similar picture on debt where you have net borrowing varying from 45 per cent of revenue in Shetland to 203 per cent in West Dunbartonshire. That is a huge difference. I do not know whether that is an issue or not, but you do say in your report that some councils will need to borrow further over the long term to provide the cash to spend on commitments identified in their reserves, and that would increase debt. You go on to make the point that you have made earlier that councillors need to be aware of what they are doing and the decisions that they are taking. I sometimes wonder whether that is the case and whether they are as informed or have the level of understanding that they should have on those very complicated issues. I will answer on the general death and I will ask Brian to talk about the internal boring point that you have raised. As I referred to in the answer to the previous question, yes, reserves, debt and financial planning are all part of the one issue. The whole thing has got to make sense as a whole. You chose West Dunbartonshire as the highest level of debt and we had a best value report on West Dunbartonshire a few months ago, and it was a very good report. Clearly, when they were looked at, that debt in the context of what they were doing and why they had the borrowing and what they were doing with the borrowing made sense and the overall judgment was good. I would say that the position is even more varied than the numbers show because you have different types of debt. You have debt that is fixed rate debt, floating rate debt and, as we were talking about Aberdeen, you have debt that is index-linked debt and that has a very different risk profile from the other more conventional forms of debt. You really need to look at each council in its own in that respect and take a round picture of what is the asset side and the liability side and does it make sense. Now on the internal borrowing side. I think that you are right to mention reserves and debt. The missing bit in the middle of that is the cash and investments that sit to support those reserves. I think that our Exhibit 9 is the attempt to show that many councils have used cash and investments so that they would have to borrow further in order to support their reserves position. That is the issue around underlying debt, not just the debt that sits on the balance sheet at the moment. The important thing for us is that this is a development approach. We are introducing some of the ideas for the first time in this report. Particularly as we go forward, I would like to explore further in further years' reports about the affordability and extent of commitments like debt and the servicing of that debt but also issues like we mentioned at Exhibit 12, which is the commitment to meet past decisions on early retirements, for example. That is something that we want to develop further in our reports. On your point about informing members, I do not underestimate the value of the overview report in terms of informing both members and practitioners. I think that it is quite a powerful tool that has been in order for 25 years in local government. Things that are said within the report have a real impact in the same way that we said a number of years ago about the need to develop medium and long-term planning. You can see in this report that we have a position where 30 councils now have medium-term financial plans. The reports do have impact, and that is an area in terms of the affordability of those commitments. That is something that we will take forward and develop further. It is a point that is not a question, because others have questions. I am thinking for councillors when they have to make important decisions, they are advised by officers, and it might be an idea if they had some kind of independent voice advising them on what the impact of certain decisions might be. It is just a point, so it is not a question. You have spent this morning talking a lot about the medium-term financial planning and identified that the majority of not all councils have not got that in place. However, you have identified within the report that a significant number of them do not have the long-term planning that possibly is required to ensure that they capture what they are planning to do in the future. Why is it the case that you think that those individuals choose not to have the long-term planning and what risks are they putting themselves at and the council by not doing that? As Fraser mentioned a few questions ago, it is not that many years ago that many councils were on a year-on-year basis. We started by emphasising the important medium-term financial planning, and now we are in a position where nearly everyone is doing the medium term, and about half have some sort of long-term, with maybe about a third having scenario long-term planning, so we are continuing to press to raise the bar and get the long-term across the board. I would say that the direction of travel on that has been very positive, and I would hope in a year or two that we succeed in having more long-term plans as well. You have touched on three councils that were in a very difficult situation with your planning and process about what they would see to happen to them if they continued, and you now believe that that has changed, that those three in Clackmannan are the ones that falls into my area, that were identified as having those difficulties. What have they done now that gives you that confidence along with the others that are now seeing that? The concern that was identified in the last report was that, based on the plans that councils had, just doing the arithmetic, they would use up all the reserves in two or three years, and that is no longer the case, so councils have addressed that. Obviously, that is still in terms of their plans. Clackmannanshire, as you will know, is an area that we had a specific concern about, and we have asked Fraser's controller to come back to the commission with the report in a few months to see how they have been addressing that. There were more issues there than simply the arithmetic on the reserves. Cassie, just frankly, the issue that has changed between 7.18.19.19 is what we cover at paragraph 30. I think that a number of councils felt unable perhaps to agree significant changes to budgets with the changes in administration around local government elections. In 17.18, we probably saw a bit of a blip in terms of resorting more to using reserves. We see the early signs of that in the 18.19 budget proposals. There is less of a dip into reserves, and we will just monitor that position to see what happens through into 1920. There is now some stability across many of those councils that were in a situation of complex financial management. By addressing and putting in terms of the transformation that has become quite apparent and also looking at what others are doing, that has given them the opportunity to develop and progress. Yes, they take on board that they need to have plans other than using the reserves. Of course, half the risk is in implementing the plans, so that still remains out there, as it were, but we will monitor that as we go forward. Thank you very much, Alexander. Annabelle, would you like to comment on that? Thank you, convener. Good morning. I wanted to raise an issue which I assume you may be aware of, which concerns equipping pensions. In fact, that issue was drawn to our attention by our colleague Linda Fabiani, MSP for Esgobride, writing to the Equality and Human Rights Committee of this Parliament, who in turn have corresponded with us on the matter, and I think with the public audit and post-legal discretionary committee. Essentially, the issue is that in terms of equal pay claims, some are being paid by way of—the back pay is being paid by way of a pay mechanism, others are being paid by way of compensation. I understand that, if you are in a larger salary being paid by way of compensation, you might be more attractive because of tax implications, but if you are not, then obviously that is not so attractive and would be diminishing your pension entitlement. It seems further to investigations that have been made that no public body takes any responsibility for enforcement of the relevant legislation, which I understand is the local government pension scheme Scotland Regulations 2014. I understand also that the SPPA issued a circular on 12 October 2016 regarding some of the matters brought in by that earlier set of regulations and clarified the policy intent that a payment of arrears of pay made in respect of an equal pay claim should be treated as pensionable. That is not happening in many, many local authorities involved. First of all, I wonder if you could clarify whether you are aware of this and secondly, within the scope of your relevant remits, what can be done to ensure that the legislation is actually being complied with? If I may, I will make some general contextual comments and then Fraser can comment in more detail. As you know, we produced an equal pay report last year and that was a very challenging report to write for a number of reasons. We noted that data was very difficult to obtain and also because of the nature of the framework and the fact that it is subject to litigation that there was frankly a sort of moving target and that there were cases in train that would affect the position. So there was very little that we could say definitively at that time. From our point of view, from an audit perspective, we are very interested in the progress of individual councils in implementing equal pay and the impact that that has on their financial position. We need to ensure that the agreements are properly accounted for. What we are not involved in is the negotiation between the parties or the regulations that the SPP issued. As you say, we do not have any enforcement role, but that is the sort of general background in Fraser. Yes, thank you, chair. It was a really helpful, a really good piece in the Herald, I think, originally that started it, and we got the correspondence then on to us via Papples, as you say. So absolutely, we are aware of it. We have written back to Linda Fabiani, we have copied the convener in both conveners of this committee and Papples, to say that, first of all, we absolutely recognise the issue. With the benefit of hindsight, we should have mentioned it in our national report. I am not sure that there was much more that we would have been able to say at that point, because that was right in the middle of there being some genuine uncertainty, I think, about the application of the 2014 regulation. As you say, that is why the Scottish Public Pensions Agency sent, in fact, two clarification circulars and letters out on that, so we were right in the middle of all of that, but that said, it would have been helpful if we'd reflected it. In terms of our role and what we are doing now, two main things, I think, one is that every year we put out guidance to all of our auditors, and the guidance in the past has mentioned this issue, so it has had a reference to section 20, as it is technically known, of the 2014 regulations. We are going to emphasise that more this year and, in particular, ensuring that auditors are fully understanding and looking at the difference between what is classed as a rears of pay and what is classed as compensation, because that is the key differential. Second of all, we routinely follow up all of our national reports with what we call an impact report, and we will build that issue into that impact report, which will be later in 2019. My final point, convener, would be that I think that colleagues have raised a really important point about whose job it is to enforce this, because it is not clear. I think that part of the difficulty in the chair mentioned this is that, even though the guidance is now clear that if it is back pay in a rears that would be pensionable and if it is compensation it is not, that is still subject to a negotiation locally. The terms that are agreed locally will decide whether it is a compensation agreement or whether it is back pay. I do not think that there is a simple thing that says that one is wrong and that one is right. This is still a process of negotiation between staff members and their representatives and the councils concerned. Certainly what we will want to do, and this is the fair challenge for us, is to have a better understanding of just what the picture is. Sunday Herald started that job in a sense, and that is part of the reason for putting more guidance out to our auditors next year. I am heartened to hear that you are taking the matter very seriously and that further information will be forthcoming. Obviously, for individuals affected, they are losing out twice. They are lost out in their pay and they are losing out in their pension, so I do not really think that this is something that we can just monitor by way of footnotes and reports and so forth. I think that this is something that has to really be looked into in that regard. Audit Scotland, have they been doing anything on this issue in particular? I see that you are. I am sorry, but Audit Scotland carries out the work on behalf of the commission and the Auditor General. We will be looking at it and our auditors audit all locals and indeed all public bodies on behalf of the commission and the Auditor General and the guidance goes out to all of them, so we will be raising the issue across the piece. We would expect to see this in a future Audit Scotland report. Certainly, when we do the impact report of the original equal pay report, which was in councils, we will follow up as part of that. Locally, we will be asking auditors to have a look at the specific issue as part of the next year's audit work. Okay, thank you very much. Okay, thank you very much. First, we have run over time. I know that Andy had a couple of questions, but we have just one, Andy, and it is very brief. Thank you very much, convener. Just three brief clarifications regarding Para 18, where it says that the basis of the calculations for the separate methods are not publicly available. Just to be clear, have you seen these? You don't have them either. Second point. In Exit 5, about council tax increases, Dundee at the right hand side has applied a 3 per cent increase in council tax, but it has no banding and volume changes. Is that because they don't know it? There must be some houses that have been built in Dundee. You could perhaps come back to me on that. Yes, we can do that. Tight on time. Finally, on Exit 3, would it be possible for you to produce that data disaggregated into revenue grant and NDR, so that we can see the relative impact of both? It is possible to do, but it is not really relevant. What happens is that the proportion of NDR and grant changes council to council, sometimes because councils. As an example, my understanding is that South Lanarkshire Council collects NDR on behalf of all utility businesses. So, the relative proportion it gets in NDR, as part of the pot, is bigger than it gets in the other element. You have to take the two as a whole, disaggregating them will tell you very little, I think. Okay, don't bother doing that then. I'd just like to final question. We talk about the implications of transformational change programmes within the councils and whether they had a destabilising effect. Also, whether workforce planning has been carried out efficiently and most importantly with effective leadership in place. Where is your view on that and how important is the effective leadership? Well, I think that leadership is extremely important and we continue to emphasise that. By leadership, we mean members and council officers and we also mean all members because I think that all members, whether they are in administration or opposition of responsibility for the corporate running of the council as an organisation. That is increasingly important as they come under financial pressure. We will be looking at the service end in our second overview in the spring and that is where we will have a better view on the issues of transformational change. I say that this report more focuses on the funding side of the sort of balance sheets so that we can expect to get something from you later on then. Okay, in that case, can I just thank you very much for your answers to our questions and for your attendance here today and I will suspend the session.