Agenda item

To present the report of the Director of Function (Resources)/Section 151 Officer.

The report of the Director of Function (Resources)/Section 151 Officer incorporating the draft Statement of the Accounts for 2022/23 was presented for the Committee’s consideration. It was noted that the figures contained within the report are unaudited and may therefore be subject to change.

The report was presented by the Director of Function (Resources)/Section 151 Officer. The draft accounts were signed by the Council’s Responsible Financial Officer i.e. the Director of Function (Resources)/Section 151 Officer on 30 June, 2023 with the audit of the accounts due to commence in August 2023. A correction was made to Table 1 in the report in that the figure of £3,258m in being a contribution from useable reserves and balances should not therefore appear in brackets. Although efforts have been made in recent years to streamline and simplify the accounts by removing notes that are considered nonmaterial, the Statement remains a technical and complicated document. The accounts including the Comprehensive Income and Expenditure Statement are presented in accordance with statutory accounting requirements rather than on the basis of how the Council is funded and as such they contain a number of items which are not charged against Council Tax and which are then reversed out to arrive at the Council’s final financial position in respect of reserves and balances.

The following elements of the Statement of Accounts were highlighted –

·         The Narrative Report which provides an overview of the Council’s financial performance for the year in question covering both revenue and capital expenditure and refers to the Council’s vision, priorities and strategies and the challenges it has faced. It also lists the core financial statements that are to follow. The narrative report provides a commentary on how the Council has used its resources during the year to achieve its stated objectives.

·         The draft Comprehensive Income and Expenditure Statement (CIES) shows the cost of providing services in the year in accordance with statutory accounting requirements and covers both the Council Fund and the Housing Revenue Account. It includes accounting adjustments such as depreciation and pensions adjustments which are not funded by Council Taxpayers so the impact of these is excluded in the note called Adjustments between Accounting Basis and Funding Basis (Note 6 in the Statement of Accounts). The CIES shows that the net cost of services was £179.355m with a deficit of £15.993m on the provision of services. Adjustments are made as per Table 1 of the introductory report to determine the movement in reserves and balances (Note 6). The CIES and adjustment Note 6 are then brought together in the Movement of Reserves Statement to show the Council balances as at 31 March, 2023 which is a true reflection of the Council’s financial position.

·         The Movement in Reserves Statement shows the changes in the year in the different reserves held by the Council. The Council had total usable reserves of £54.742m distributed between the General Reserve, Earmarked Reserves, the Housing Revenue Account, School reserves, Capital Receipt Reserves and Capital Grants Unapplied Reserve as at 31 March 2023. This is a reduction from the £58m of the previous year. These are resources which the Council has available to spend. The Council’s draft General Fund balance stood at £13.967m which is equivalent to 8.8% of the net revenue budget for 2022/23 and is £6.067m above the minimum threshold for the General Fund Balance set by the Executive which is 5% of the net revenue budget or £7.9m. 

·         The Expenditure and Funding Analysis aims to show the real impact of the year’s financial performance on the Council’s balances. Although it is difficult to reconcile the CIES to the information presented in the tables within the report the Expenditure and Funding Analysis fulfils this function in part. The CIES includes many accounting adjustments which are not true costs which affect the Council’s usable balances. To ensure that these accounting costs do not affect Council taxpayers and Council funds, they are cancelled out in the Expenditure and Funding Analysis.

The Balance Sheet shows the value of the Council’s assets and liabilities as at 31 March 2023. The value of the Council’s net assets increased by £132.769m from £272.233m in 2021/22 to £405.002m at 31 March 2023. The value of the Council’s long-term assets increased by £20.918m due to capital expenditure on the Council’s property, plant and equipment and the revaluation of existing assets. The most significant change relates to the  accounting valuation of the Pension Fund which for 2022/23 is shown to be in a net asset position of £19.815m which is an improvement of £141.014m on the previous year. This is due to the impact of interest rate and bond rate increases upon which the discount factor is based and the Actuary is required to use when discounting the future obligations of the pension fund with the current value of the pension fund assets. However, as accounting standards do not allow this to be reported as an asset in the Balance Sheet because the Council cannot realise the value of the asset at this point, it is shown as nil on the Balance Sheet. The results of the accounting valuation are explained in the Local Government Pensions note 34 to the accounts.

·      The Cashflow Statement shows the changes in cash and cash equivalents of the Council during the financial year and shows how the Council generates and uses cash and cash equivalents by classifying cash flows as operating, investing and financial activities.

·      The notes to the accounts provide further information and context to the figures contained in the core financial statements.

In the ensuing discussion on the contents of the Statement of the Accounts the Committee raised the following matters –

·      Whether the accounts for 2022/23 show any significant changes or adverse trends compared to previous years’ accounts.

The Committee was advised that a point of focus are the Council’s balances which have increased over the past two years due to the provision by Welsh Government of additional funding to meet the cost of the Covid-19 pandemic response but which are now beginning to decrease. The Council has a planned use for elements of its reserves particularly the earmarked reserves and the Housing Revenue Account reserves because those have been set aside for specific purposes. School balances are also expected to reduce as schools fully utilise the Covid catch up funding which was provided by Welsh Government to help pupils make up for missed learning during the pandemic. The £1.212m underspend on the 2022/23 revenue budget has contributed to the Council’s General Balances bringing the total to £13.967m although £3.8m of this sum has been committed to fund the 2023/24 budget and the reserves  will likely be drawn down again to balance the 2024/25 budget. Any overspend on the 2023/24 budget will also have to be funded from reserves.  While there are no changes/movements in the accounts that are a cause of concern at the present time it is foreseen that the Council will face challenges in the future particularly in setting a balanced budget for 2024/25, and a downward trend in the Council’s balances is predicted as a result. The position will be reviewed in setting the 2024/25 budget and the Medium-Term Financial Plan.

·      The lack of specific reference in the accounts to provision for climate change and carbon reduction projects.

The Committee was advised that a new Capital Strategy is in development which will consider the Council’s capital requirements and priorities and how those will be funded. However, addressing all the Council’s capital needs and aspirations would require a significant amount of funding which in terms of borrowing is unrealistic and unaffordable. Needs therefore have to be prioritised and balanced against affordability so that the Council does not become financially overstretched to the extent as in some councils where servicing debt costs is putting pressure on revenue resources. The level of borrowing to support capital expenditure has to be carefully considered and the strategy endorsed by the Executive and Council mindful also that the residents of Anglesey may have to pay more annually for investment in assets and for making progress towards net zero targets. Whilst achieving net zero status is among the Council’s priorities no specific provision has been made in that regard to date.

·      Clarification of the debtors figures, the relationship with the bad debt provision totalling £8.149m and debt collection.

The Committee was advised that the Council’s debts are assessed for the value and age of the debt as well as the likelihood of its being successfully recovered. The older a debt the less likely it will be recovered. A bad debt provision is made annually and a charge is made to the revenue budget accordingly which funds the provision. Debts that are authorised to be written off because they are assessed as unrecoverable are removed from the system and are then charged against the bad debt provision. Some types of debt are more difficult to collect than others e.g. home/residential care debts where vulnerable individuals are involved and the service cannot be withdrawn or where hardship is a factor and these are reflected in the annual assessment. In the case of Council Tax, the tax base when determined annually is not set at 100% to allow for an element of non-collection (the current Council Tax collection rate is approximately 99.3%). The sum of £8.149m noted in the accounts reflects what the Council taking a prudent approach, has assessed as an amount that may have to be written off (having considered the types of debt outstanding and having exhausted recovery processes) which in the context of the total amount of income collected by the Council annually is not an exceptional sum.

·      The impact of interest rate rises on the Council’s borrowings taking account of the fact that while the Council will receive a higher return on its investment it will conversely be paying more for borrowing.

The Committee was advised that the Council routinely borrows from the PWLB for a fixed term ranging from one to fifty years and that the interest rate varies according to the length of the loan term with more favourable rates  for longer loan terms. Whilst interest rates were low the Council has been using its cash balances to fund capital expenditure as the return on investment was poor. As interest rates have increased the returns on investment are now such that they have surpassed PWLB’s long term interest rate thereby raising the question of whether it is now timely for the Council to be taking out borrowing given that it has the capacity to do so having previously used internal borrowing instead of borrowing externally and because any cash surplus would now be better invested than used to fund capital activity. The risk in borrowing long-term at this point in time is that interest rates may reduce and the Council could find itself locked into a higher rate for a length of time when it could have borrowed more cheaply had it waited. In determining whether or not to borrow therefore the Council will consider a number of factors including timing as part of its treasury management strategy. Lending between authorities is also an option albeit on a smaller scale and subject to due diligence checks.  

·      The increase in the valuation of the Council’s assets and the basis for the increase, what it means in practical terms if the value of the assets cannot be realised and whether assets have a part in borrowing.

The Committee was advised that Council borrowing is not secured against any of its assets as the PWLB lending facility is operated by the Government with Government funds. The valuation of assets fulfils accounting requirements. However, the Council will sell assets that are considered surplus to requirements because they no longer have any operational use e.g. schools that have been closed as part of the schools’ modernisation programme and the capital receipts have been used to fund new schools. The Council’s assets include its housing stock which because the properties are tenanted are valued at Social Housing existing use value rather than market value. In terms of funding capital activity, the Council seeks to maximise grant funding in the first place including the General Capital Grant and supported borrowing from Welsh Government (where the costs of borrowing are met by Welsh Government) in order to reduce the need to borrow externally. The Council will consider undertaking unsupported borrowing if the investment  brings in income, generates  savings e.g. in running costs or increases the value of an asset but it would have to meet the costs of so doing from its revenue budget in the form of interest  payments and the Minimum Revenue Provision which is a charge made to the revenue budget annually to set aside a sum to pay back the loan. These are factors in considering whether to borrow to ensure that borrowing remains affordable. Councils that are experiencing difficulties in servicing their debts have borrowed to invest in commercial properties for income which due to factors including the pandemic have not provided the revenue returns expected.

·      Whether the increase in the cost of providing services from £147.569m in 2021/22 to £179.355m in 2022/23 as shown in the CIES is an actual increase and is a year-on-year increase and if so whether it is a cause for concern.

The Committee was advised that the increase does in part represent a real increase in the cost of providing services due to inflation and pay rises as borne out by the Council’s revenue budget for 2023/24 which at £175m net is an increase in the region of £16m on the previous year’s budget. However, the figure for the cost of services in the CIES also includes items such as depreciation and pension current service costs which are included for accounting purposes rather than as a reflection of how the Council is funded. A more accurate comparison on a funding basis is made in the Expenditure and Funding Analysis where the net expenditure has increased from £123.596m in 2021/22 to £148.068m in 2022/23 but having regard to the fact that this figure also includes the HRA which is separate and is not funded by Council Tax. The cost-of-living crisis is having an impact on the Council in the form of inflation and rising costs and is a challenge going forwards.

·      The valuation of the Pension Fund which has changed from a liability of £121.199m in 2021/22 to an asset of £19.815m in 2022/23 due to the impact of interest rate and bond rate increases. If rising interest rates and therefore the impact are seen as potentially short-term it was asked whether the accounts should be restated on the liability and whether it is possible to prevent the distortion in the Balance Sheet which significant variations in the valuation of the Pension Fund can create.

The Committee was advised that the valuation of the Pension Fund by the Actuary for the purpose of the accounts is theoretical and projects what the Council’s liability or asset would be if the fund ceased to exist. It is carried out on an accounting basis and the results do not affect the Council’s actual funds. The funding valuation completed every three years for the purpose of calculating the contributions and level of funding required is a more accurate measurement of the true value of the Fund as it considers  the actual assets that the fund is invested in at the valuation date and assesses whether the returns on those assets are likely to meet all future payments to members based on all the benefits earned up to the valuation date. For this valuation a different set of assumptions is used. If the value of the assets and future returns are lower than the estimated future liability then the Council’s contribution rates will increase to make up the difference over an agreed period of time. At the last funding valuation the Pension Fund was 110% funded.

·      With regard to the £40.690m total capital spend for 2022/23 it was noted that whilst £26.595m was capitalised and added to the value of assets in the Council’s Balance Sheet, the remainder was charged to the CIES of which £11.881m did not increase the value of capital assets. It was queried whether this could have been predicted.

The Committee was advised that accounting rules mean that the capital expenditure to which the sum refers is treated as revenue in the accounts because it has not been spent on or increased the value of a Council owned asset. This is the case for example with Disabled Facilities Grant expenditure which for the purpose of the Council’s budget and funding is treated as capital expenditure as it is funded from capital resources but because it involves improvements to a private property rather than to an asset owned by the Council is treated as revenue in the accounts.

·      Given the complexity of the Statement of Accounts, its value in providing the public readership with a true representation of the Council’s financial performance and position was questioned especially as the figures in the financial statements can be misconstrued and are difficult to relate to the Council’s actual budget outturn figures. It was suggested that a short and simplified summary of accounts information that is easily accessible to the public could be published and that it be highlighted on the Council’s website perhaps alongside the Council Budget Book which provides detailed information about service budgets.

The Committee was advised that the budget monitoring and outturn reports to the Executive provide information about the actual performance of the Council’s services against budgets in the year as well as the progress of capital expenditure and activity and that these are available under the committees and meetings section of the website.

The Director of Function (Resources)/Section 151 Officer confirmed that he would consider drafting a one-page summary of headline accounts figures for the Council’s website.

Having scrutinised the draft Statement of the Accounts for 2022/23 the Governance and Audit Committee resolved to note the draft unaudited main financial statements for 2022/23.

Action: A summary of headline accounts information be produced and along with the Council Budget Book be signposted on the Council’s website to be more easily accessed by the public.