Agenda item

To present the report of the Head of Function (Resources) and Section 151 Officer.

The report of the Head of Function (Resources) and Section 151 Officer incorporating the draft pre-audit Statement of Accounts for the 2017/18 financial year along with the draft Annual Governance Statement for 2017/18 was presented for the Committee’s consideration.

The Head of Function (Resources) and Section 151 Officer reported that the Council has a statutory duty to approve and publish a Statement of Accounts for each financial year. Before External Audit can commence, the Section 151 Officer is required to sign the Statement of Responsibilities for the Statement of Accounts prior to the statutory deadline of 30th June each year. The Statement of Accounts for 2017/18 was completed well in advance of this date in readiness for the earlier closedown of accounts in 2018/19 when the legal deadline for the completion of the draft accounts becomes 15th June, 2019. As from 2020/21 onwards, the legal deadline for completing and signing the draft Accounts will again be brought forward to 31 May. The Officer said that the structure and contents of the accounts have not materially changed with the prefatory narrative report, which is a key section of the accounts, providing a guide to the most significant matters reported in the accounts in an accessible and easy to understand way along with contextual information about the Isle of Anglesey County Council. The format of the Statement is prescribed by accounting regulations and practices and contains the Comprehensive Income and Expenditure Statement, the Expenditure and Income Analysis; the Movement in Reserves Statement, the Balance Sheet, the Cash Flow Statement and the Notes to the Accounts which elaborate in an explanatory way on the figures in the main accounts. Also included are the Housing Revenue Account and accompanying notes and the Annual Governance Statement for 2017/18.

The Officer highlighted the following as main points of consideration within the Statement of Accounts for 20-17/18:

•           That although the Statement of Accounts is meant to give electors, local taxpayers, member of the Council, employees and other interested parties clear information about the Council’s finances, it is a complicated and technical document which is set out in accordance with the Code of Practice on Local Authority Accounting - compliance with the requirements of the Code in preparing the accounts being one of the factors which the External Auditor assesses in conducting the audit of the accounts.

•           That paragraph 3.4 of the narrative report gives a summary of the Council’s financial performance for the financial year ending 31 March, 2018 including its revenue and capital expenditure. In 2017/18, the Council reported an overspend of £1.78m against a planned activity of £126.2m (net budget) and achieved £1.704m of savings. The table in paragraph 3.4.1 reflects the final budget for 2017/18 and the actual income and expenditure against it by service. The Capital Budget was underspent in the year with the total spend amounting to £29.355m against a Capital Budget of £52.672m. The Capital Programme has made steady progress in the year achieving a delivery rate of 55.73%. It is expected that the remaining schemes will be delivered over the coming few years. The information presented in section 3.4 is in line with that provided in financial monitoring reports presented to the Council’s Executive in May and June, 2018.

•           That the Comprehensive Income and Expenditure Account Statement (CIES) shows the accounting cost in the year of providing services in accordance with generally accepted accounting practices rather than the amount to be funded form taxation. The CIES  for 2017/18 shows a deficit on continuing operations of £143.869m compared to £122.889m in 2016/17 the main variance being in Lifelong Learning net expenditure which is £18m higher than in 2016/17 but which includes an item of capital which does not have an impact on how the Council is funded. The total comprehensive income and expenditure for 2017/18 was a surplus of £21.764m compared with a deficit of £9.242m in 2016/17 the additional income being attributable to the revaluation of non-current assets (£43.058m) and the re-measurement of net pension liability (£7.413m). These are items which are included in the accounts because of accounting requirements as opposed to being items which are funded from local taxation.

•           That the Expenditure and Funding Analysis for 2017/18 shows the closing Council Fund Balances (usable reserves) and HRA Balance to be £27.856m down from £31.345m for 2016/17.

•           That the Movement in Reserves Statement shows movement in the year to and from the reserves held by the Council divided into usable reserves (i.e. those that derive from the Council’s activity and can be spent) and other unusable reserves (those deriving from accounting adjustments and cannot be spent).  The surplus/(deficit) on the provision of services line reflect the true economic cost of providing the Authority’s services more details of which are provided by the CIES. The Statement shows that the General Council Reserve reduced by £2.003m for 2017/18 resulting in a total general reserve of £6.352m due primarily to the Revenue Budget overspend of £1.7m referred to earlier. The Earmarked Reserves Fund has also reduced from £13.357m to £11.910m as has the Housing Revenue Account (HRA) in the amount of £139k making a balance of £7.405m as at 31 March, 2018.  The Capital Receipts Reserve has generated a surplus of £320k whilst School Balances have reduced from £2.089m to £1.869m mostly within the primary sector with secondary sector balances having increased marginally. The Council’s total usable reserves as at 31 March 2018 were £27.856m whereas the total unusable reserves stood at £158.727m.

•           That the Balance Sheet shows the value of the assets and liabilities recognised by the Authority as at the Balance Sheet date i.e. 31 March, 2018. The net assets are matched by reserves held by the Authority. The Balance Sheet shows that the value of the Council’s assets has risen from £164.819m as at 31 March, 2017 to £186.583m as at 31 March, 2018 due mainly to an increase in the value of the Council’s property, plant and equipment (line 1 of the Balance Sheet).The Council’s cash and cash equivalent balances have reduced from £14.949m as at 31 March, 2017 to £7.789m as at 31 March, 2018. However, the Balance Sheet provides a snapshot only of the Council’s financial position at a specific point in time showing the value of its assets and its liabilities as at 31 March, 2018. It does not provide a true reflection of the Council’s financial standing.

•           That the Cash Flow Statement shows the changes in cash and cash equivalents of the Council during the reporting period. The decrease in the Council’s cash balances tallies with the Treasury Management Strategy as approved by Council of using available cash balances to minimise borrowing requirements as the cost of borrowing is higher than the returns on investments.

•           That the Notes to the Core Financial Statements provide more details about the Council’s accounting policies, items and the figures contained within the main financial statements referred to above. They clarify items that are included in the accounts because of accounting rules as well as providing additional information about items such as grant income, officer remuneration, the local government pension scheme and contingent assets and liabilities (possible income which the Council may receive and/or possible costs which it may incur) The Officer highlighted the notes likely to be of main interest to the Council’s stakeholders in reading the statements.

•           The Annual Governance Statement for 2017/18 – this sets out the processes, systems, principles and values by which the Authority us directed and controlled. The Statement enables the Authority to monitor the achievement of its strategic objectives and to consider whether those objectives have led to the delivery of appropriate and cost effective services. It also set out the arrangements that have been put in place to manage and mitigate the risks it faces in undertaking its activities and responsibilities.

The Committee considered the information presented in the accounts and raised the following points –

•           The Committee noted that the draft Accounts for 2017/18 had been prepared in a timely way and well in advance of the current statutory deadline of 30 June.

•           The Committee noted that the narrative foreword provides a fair and understandable summary of the Council’s financial performance and financial position for the financial year ending 31 March, 2018 and that it sets out the key events and their effect on the financial statements.

•           The Committee noted that the Table in 3.4.1 of the narrative report shows the final budget outturn for each service for 2017/18. The Committee sought clarification of whether it is possible to trace the figures in Table 3.4.1 to the financial statements.

The Head of Function (Resources)/Section 151 Officer said that the figures are traceable through the Comprehensive Income and Expenditure Statement (CIES) as well as explanatory Note 1 (a) and Note 11. The CIES contains items which are included because of accounting requirements e.g. pensions’ liability and depreciation which are then removed from Council Tax setting because as accounting items, they do not have a bearing on how Council services are funded and are therefore not actual costs which affect the Council’s General Fund balances. The explanatory notes do the job of removing these accounting adjustments and re-inserting the items that are funded from taxation thereby giving a clearer view of the Council’s financial position. The narrative report is the Management Accounts i.e. figures that are based on the Council’s activities and the cost of services whilst the financial statements are the statutory accounts which are  prepared to a set format according to regulations and which include items that are not directly related to how the Council is funded.

The Committee requested that it be provided with information that shows how the figures in table 3.4.1 are reconciled to the financial statements.

•           The Committee noted that the Council is approaching its minimum reserves threshold and that £1.78m was taken from the General Reserves in 2017/18 to fund the over expenditure on the Revenue Budget due mainly to overspending by Children and Families Services on out of county placements for looked after children. The Committee further noted that the narrative report acknowledges that increasing numbers of looked after children and other social care demands are a considerable risk to the Council’s balances due to the high cost of placements (as much as £250k per looked after child per annum) for individuals with complex needs. Given this context therefore and the recognised risk,  the Committee sought clarification of whether the Council should be making a separate contingency provision for the very real likelihood of these pressures continuing and their implications for the Council’s financial position.

The Head of Function (Resources)/ Section 151 Officer said that the Council was in the fortunate position of having £8.3m general reserves at the beginning of the 2017/18 financial year. The Section 151 Officer is required to come to an assessment based on a number of factors including the Council’s financial standing and management and the risks it faces, of the prudent level of reserves which the Council should hold. For 2017/18 the minimum level of reserves which the Section 151 Officer assessed as adequate was in the region of £6m to £6.5m. Although due to the overspend on the Revenue Budget the level of reserves has dropped and is now approaching the minimum value, it does not necessarily follow that the Section 151 Officer will not countenance any further drop and could allow the reserves to dip below the threshold providing he is satisfied that there is a plan to then restore the balances to a desired level through a budget provision. The Head of Function (Resources) said that the sum of £1.3m has been incorporated within the Council’s Medium Term Financial Plan (MTFP) to cover the additional cost of   placements for looked after children together with the cost of the education provision that comes with the placements if they are out of county. Both Children’s Services and the Lifelong Learning Service are working on various projects to in an effort to reduce the costs. At the root of the matter is the lack of provision locally be that through foster carers or specialised residential placements. The Service is seeking to increase the number of foster carers on Anglesey which would then allow more of the Authority’s looked after children to remain in mainstream education on the Island thereby reducing the need and therefore the cost of out of county provision. It is however recognised that the strategy of reducing the average placement cost by increasing local provision might not be sufficient to bridge the whole of the £1.7m budget gap, so the MTFP allows for a budget increase as well. Other relevant factors are the value of the local government settlement and the Welsh Government’s spending priorities when it comes to allocating funding. The Council is planning on the basis of a worst case scenario i.e. a £10m budget shortfall over the next 3 years but which allows for additional funding for Children’s Services.

The Leader and Portfolio Member for Social Services gave an example of the kind of specialist therapy and provision a looked after child with a troubled background might require the costs of which can quickly escalate. She said that as a demand led service, it is difficult to project costs for the Looked-After Children’s budget and although the Authority is seeking to develop local solutions as far as possible, the steady increase in the number of looked after children is a national phenomenon  and needs to be addressed at national level.

•           The Committee noted that that the net liability on the Local Government Pension Scheme is £104.633m.The Committee sought clarification of whether this is a matter that the Council should be concerned about in terms of being able to meet its liabilities and also in terms of the potential future effect on the Council’s financial standing. The Committee sought assurance that it is a risk that the Council is able to manage.

The Head of Function (Resources)/Section 151 Officer said that the deficit on the Pension Scheme is historical with local government reorganisation in 1996 being a factor in contributing to it. At that time, a large number of council employees were allowed to retire early as a result of the restructuring some of whom were made redundant and some of whom took early retirement. This puts a strain on pension costs as does longevity as individuals live longer in retirement meaning they are paid pension benefits for a longer period. However as their pension contribution would have been lower in the early part of their employment the deficit in the Fund builds over time. Over the past 10 year the Pension Scheme has been remodelled with reforms taking place in 2008 and again in 2014 when the scheme became a Career Average scheme rather than a Final Salary Scheme. The reforms should mean that the deficit does not grow. Also, based on the evaluation made by the Pension Fund’s Actuary, the Council as employer has been making higher contributions to the Fund, and it pays an annual lump sum as a deficit contribution. The Officer confirmed that he did not consider the Pension Fund deficit to be a matter of concern because the Council is making higher contributions to the Fund to bring down the deficit, because the Pension Fund has been reformed and because the Scheme is ongoing meaning that its liabilities are not going to all crystallise at the same time. 

•           The Committee noted that the Council as at 31 March 2018 had a short-term net debtor balance of £24.594m and that a review of arrears balance suggested that impairment of doubtful debts of £5.377m is appropriate leaving the Council therefore with a short-term debt balance of approximately £19m. The Committee sought clarification of whether this approach means the Council is confident of being able to recover the monies owing and also whether this approach is appropriate given that the accounts also state that any differences between the impairment level applied and the actual arrears position will reflect in future spending patterns.

The Head of Function (Resources)/Section 151 Officer said that the Council’s approach is in accordance with the Code. In considering debt the Council will have regard to the debt type, the debt value, the age of the debt following which it assesses the amount of debt it is likely to be able to recover. Whereas the Council is very proficient in collecting Council Tax and Non-Domestic Rates with an approximately 98% collection rate in-year and an approximately 99% collection rate over a period of 3 years - writing off less than 1% of the council tax debt each year – it is less proficient in collecting other sundry debts. This is because Council Tax collection is easier because of the procedures including legal procedures, underpinning the recovery process. The impairment provision represents the worst case scenario and it is very possible that the Council will collect more than the sum shown as impairment.

•           The Committee noted that the External Audit fee for 2016/17 was £88k and that for 2017/18 it is £182k; the Committee sought clarification of the higher than expected increase.

The Head of Function (Resources)/Section 151 Officer said that the increase in the audit fee is due to the work undertaken by External Audit on the Housing Benefit Subsidy Grant claim and is subject to the number of errors identified. The Authority was also overcharged in the changeover of external auditors from PwC to Delloite. The refund will be shown in next year’s accounts.

Mr Gwilym Bury, WAO confirmed that the only variable in the External Audit fee is the grant related work and in particular the Housing Benefit Subsidy Grant claim which is a complex item and which can lead to additional work thereby incurring additional charges.

It was resolved that the Audit and Governance Committee -

•           Accepts and notes the draft Statement of Accounts for 2017/18 prior to its review by External Audit.

•           Accepts the Annual Governance Statement for 2017/18 as a fair reflection of the Council’s operations over the year.

ADDITIONAL ACTION: The Committee to be provided with information on how the Budget outturn figures in paragraph 3.4.1 of the narrative report are reconciled to the financial statements.