Agenda item

To present the report of External Audit.

The report of External Audit on the outcome of an assessment of the financial sustainability of the Isle of Anglesey County Council was presented for the Committee’s consideration. The assessment was undertaken as financial sustainability continues to be a risk to councils putting in place proper arrangements to secure value for money in the use of resources. External Audit’s 2020/21 assessment on councils’ financial sustainability was in two phases: Phase 1 was a baseline assessment of the initial impact of Covid-19 on local councils’ financial position following which a national summary report regarding the financial sustainability of Local Government as a result of the Covid-19 pandemic was published. The report above concludes Phase 2 of External Audit’s financial sustainability assessment work during 2020/21 as part of which a local report is being produced for each of the 22 principal councils in Wales.

Mr Alan Hughes, Audit Wales’s Performance Audit Lead commenting that the conclusion of the assessment overall was positive but that a number of challenges remain, referred to the headline findings as follows –

·         The Council has a good understanding of its financial position and currently delivers services within overall budget, but several financial challenges remain – the immediate impact of Covid19 on the Council’s financial sustainability has been mitigated by additional Welsh Government funding. The Council will incur in the region of £6.2m of additional Covid-1h9 related expenditure and £2.4m loss of income during 2020/21. The Council will have incurred £0.1m additional expenditure and income loss that has not been covered by additional funding.

·         Increasing budgets of demand led services has enabled the Council to deliver services within overall budget, but several financial challenges remain – the Council’s Corporate  Asset Management Plan for Land and Buildings for 2015-2020 is out of date and needs to be updated. In common with other councils in Wales, the Council has limited access to capital funding thereby reducing its capacity to undertake capital investment;  difficulties in predicting with any degree of certainty what future levels of Aggregate External Financing will be before the announcement of the draft settlement in December leads to the presentation of a significant aggregate funding gap in the Medium Term Financial Plan

·         The Council’s financial strategy has restored the general fund to target level, but the Council continues to use reserves to balance the budget, this is not sustainable – the Council’s level of usable reserves increased to £29.7m by the end of 2020/21 which is 20.6% of the net cost of services. The Council utilised £300,000 of reserves to fund the 2021/22 budget which allowed for a 0.75% reduction in Council Tax. Funding baseline commitment form one-off funding sources is not sustainable and leads to unresolved funding pressure in future budgets.

·         The Council has delivered services within budget in 2019/20 and 2020/21 after deficits in the two preceding years

·         Identifying and delivering savings will be more challenging going forward – the Council delivered 86% of the planned savings in the 2019/21 budget (£2.2m of £2.56m) and 79% of the planned savings in the 2020/21 budget (£244k of £307k). Exhibit 7 shows the Council’s planned savings during 2016/17 to 2020/21 set against actual savings. Unachieved planned savings in one year adds to the pressure to deliver savings in subsequent years.

·         The Council’s liquidity after a period of decline has recently stabilised.

·         The report contains one proposal for improvement in relation to updating and approving the Council’s Asset Management Plan.

Responding to the report, the Director of Function (Resources)/Section 151 Officer welcomed the report as supportive of the Council’s financial management arrangements and thanked Audit Wales for the comments and analysis. He agreed that the additional investment which the Council has made in demand led services more accurately reflects those services’ budgets and brings them into closer alignment with their needs meaning those budgets are now more robust. However, the situation may change depending on future levels of demand as the Council continues to emerge from the pandemic which may mean those budgets having to be reviewed. As with many other councils in Wales, Anglesey’s  financial position has improved  due in no small part to the Covid 19 related financial support provided by Welsh Government in what was an exceptional year; however it is expected that the call for the Council’s services will increase as a result of the pandemic thus adding  to the Council’s costs. This has been raised as a risk with the Executive which subsequently approved increasing the minimum level of General Fund balances above the 5% of the net revenue budget benchmark to £9m for 2021/22 in order to mitigate the impact of any significant rise in costs to the Council which could lead to potential overspend. The Section 151 Officer acknowledged the point made by External Audit about the Council not always succeeding in delivering its intended savings in full; in accordance with a previous recommendation by External Audit, the Council is considering setting a savings target over and above what is needed to deliver a balanced budget so that it has a surplus to fall back on.  While the future remains uncertain, it is hoped that Welsh Government may be able to give an indication of what the level of local government funding will be over a longer term than the current annual determination of funding. With regard to the report’s single recommendation, updating the Asset Management Plan is in the offing with further work required to bring the Plan into alignment with the Council’s Capital Strategy.

In considering the contents of External Audit’s assessment, the Committee made the following points –

·         In noting that delivering all planned identified savings year in year out is becoming an increasing challenge especially if reductions in services are to be avoided, the Committee wanted to know whether other local authorities in Wales are in a similar position. Mr Alan Hughes, Audit Wales in confirming that this is a dilemma facing all local authorities in Wales and beyond especially after a prolonged period of austerity, accepted that the financial environment in which local authorities are currently operating is very challenging.

·         Referring to the contribution made by carers throughout the pandemic the Committee noted that a 3% pay rise has been recommended for healthcare workers.  The Committee sought clarification of the likely pay increase for care sector workers and the possible resulting cost implications for the Council.

The Director of Function (Resources)/Section 151 Officer clarified that care needs on Anglesey are met in two ways – by the Council’s own care staff and by staff in the independent care sector under contract to the Council. For 2021/22 the offer for non-teaching Council staff is a pay increase of 1.75% which at this point in time has not been accepted by the Unions who have pointed out the higher offer made to health sector workers and the need for fairness between the two sectors. Explaining that the Council has two main agreements which are used to determine pay and conditions – the one covering teaching staff and the other non-teaching staff, the Section 151 Officer advised that the Council is not able to differentiate between categories of non-teaching employees when it comes to pay increases and further it is not a decision for the Council alone – the non-teaching staff pay award is set by agreement across England and Wales. Additionally, there are two measures of pay, the Government’s National Living Wage and the Real Living Wage advocated by the Living Wage Foundation. Whilst the Council pays above the Real Living Wage, independent care sector providers generally pay below the Real Living Wage although pay rates for their staff is a matter for each independent provider to determine. Calls to financially recognise the pandemic contribution of care workers are likely to be made, and should independent care sector providers decide to increase their staff pay to up to the Real Living Wage (an increase of around £1 p/h) and pass the cost onto the Council in the fees the Council pays providers, then that would entail an estimated additional cost to the Council of approximately £750k which the Council would find difficult to fund without additional support in the settlement from Welsh Government or alternatively, by increasing Council Tax by 2%.

·         Referring to the recommendation that the Council’s Asset Management Plan be updated, the Committee sought clarification of the Plan’s significance in the context of the Council’s financial sustainability. Mr Alan Hughes, Audit Wales clarified that the Council’s aspirations for its assets will likely have changed since the existing Asset Plan was formed so bringing it up to date affords the Council the opportunity to reconsider its asset base and to link the Plan with its ambitions balanced against what is affordable.

The Director of Function (Resources) and Section 151 Officer advised that the Asset Plan needs to set out an inventory of the Council’s current assets, condition, suitability and investment needs; it is then for the Executive to determine a strategy based on how many of those assets it deems are necessary to deliver services in an efficient and cost effective way. It may be that not all the assets the Council holds are required to meet service objectives and neither may it be affordable to do so given the constraints on capital funding and the high cost of maintenance. The Asset Management Plan in providing an overview of the overall property assets held by the Council and their cost, feeds into the Capital Strategy which sets out the availability of resources and their allocation for capital purposes. An added complication are carbon reduction targets the achievement of which will require significant investment and which may mean having to dispose of assets that can’t be adapted or transformed into carbon neutral buildings.

·         With reference to External Audit’s comments about the use of reserves to help fund the revenue budget as unsustainable, the Committee wanted to know whether the Council’s current system is therefore a risk and needs to be changed. Mr Alan Hughes, Audit Wales confirmed that the Council utilised £300k of reserves to fund the 2021/22 budget; he advised that that would have been a matter of greater concern 2 to 3 years ago when the Council’s budget was overspent and its usable reserves had decreased significantly. Although it is not an immediate concern at this point in time as the figure is not significant, using reserves in this way is not advisable as the saving will have to be made in the following year when it will be added to that year’s savings thereby increasing the financial pressure on the Council.

The Director of Function (Resources) and Section 151 Officer clarified that Elected Members have been advised that the use of reserves to fund the revenue budget is not a sustainable strategy in the long term. However, £300,000 was drawn from the reserves to fund the 2021/22 budget in the context of an improved general reserves position and also in the knowledge that savings that would meet the £300k shortfall (school meals contract) were to become available in 2021/22. While the Council will assess the situation for 2022/23, the strategy is that general reserves will not be used to fund the revenue budget unless there is no other option available. The Executive will be advised on proposing a budget for 2022/23 that can be balanced without resorting to the use of reserves.

It was resolved to accept External Audit’s report on the financial sustainability of the Isle of Anglesey County Council and to note its contents.