Agenda Document Pack - Audit Committee - 25/11/2024
Midlothian Council · 25 November 2024
Back to Audit Committee — 25 November 2024 and its agenda
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Notice of Meeting and Agenda Audit Committee Venue: Council Chambers/Hybrid, Midlothian House, Dalkeith, EH22 1DN Date: Monday, 25 November 2024 Time: 11:00 Executive Director : Place Contact: Clerk Name: Democratic Services Clerk Telephone: Clerk Email: democratic.services@midlothian.gov.uk Further Information: This is a meeting which is open to members of the public. Privacy notice: Please note that this meeting may be recorded. The recording may be publicly available following the meeting. If you would like to know how Midlothian Council collects, uses and shares your personal information, please visit our website: www.midlothian.gov.uk Page 1 of 268
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1 Welcome, Introductions and Apologies 2 Order of Business Including notice of new business submitted as urgent for consideration at the end of the meeting. 3 Declaration of Interest Members should declare any financial and non-financial interests they have in the items of business for consideration, identifying the relevant agenda item and the nature of their interest. 4 Minute of Previous Meeting 4.1 Minute of Audit Committee 30 September 2024 3 - 12 4.2 Audit Committee Action Log Nov 2024 13 - 14 5 Public Reports 5.1 Annual Audit Report to Members and the Controller of Audit – year ended 31 March 2024, report by Audit Scotland, External Auditor 15 - 72 5.2 Annual Accounts for the year ended 31 March 2024, report by Chief Financial Officer 73 - 180 5.3 Treasury Management Mid-Year review 2024/2025, report by Chief Financial Officer 181 - 204 5.4 Internal Audit Work to October 2024, report by Chief Internal Auditor 205 - 218 5.5 Follow-Up Review of Completed Internal Audit Recommendations and Progress Update, report by Chief Internal Auditor 219 - 234 5.6 Audit Scotland Report: The National Fraud Initiative in Scotland 2024, report by Chief Internal Auditor 235 - 268 6 Private Reports No items for discussion 7 Date of Next Meeting The next meeting will be held on Monday 27 January 2025 at 11am. Page 2 of 268
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Minute of Meeting Audit Committee Monday 25 November 2024 Item 4.1 Audit Committee Date Time Venue Monday 30 September 2024 14.00 pm Council Chambers/Hybrid Present: Councillor Milligan (Chair) Councillor Bowen Councillor McEwan Councillor Smaill Councillor McCall In Attendance: Grace Vickers Chief Executive Alan Turpie Legal and Governance Manager/Monitoring Officer Kevin Anderson Executive Director Place Morag Barrow Director of Health & Social Care: Midlothian HSCP / Chief Officer to Midlothian IJB Derek Oliver Chief Officer Place Marc Bedwell Programme Manager, Children, Young People and Partnerships David Gladwin Chief Financial Officer/S95 Officer Duncan Stainbank Chief Internal Auditor Claire Gardiner Audit Scotland Iina Jaara Democratic Services Team Leader Maria Perez Democratic Services Officer Page 3 of 268
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1. Welcome and Apologies for Absence The Chair welcomed everyone to the meeting. Apologies were received from Fiona Robertson. 2. Order of Business The order of business was as detailed in the agenda. 3. Declarations of interest No declarations of interest were intimated at this stage of the proceedings. 4. Minute of Previous Meeting 4.1 The minute of the meeting of 24th June 2024 was submitted and approved as a correct record. 4.2 The Action Log was submitted and noted. 5. Public Reports Report No. Report Title Submitted by: 5.1 Midlothian Council Workforce Innovation: How councils are responding to workforce challenges Audit Scotland Outline of report and summary of discussion The purpose of this report was to provide members of the Audit Committee with an update of how Midlothian Council is dealing with modern day workforce challenges. Audit Scotland is currently on the second year of a Best Value program focusing on workforce integration across the council with its partner bodies and also looks at other factors such as financial constraints, IT strategy and flexible workforce across the council. The Audit Scotland report notes Midlothian is the fastest growing Local Authority in Scotland which brings about challenges. To ensure service delivery to an increasing population Midlothian Council requires a strong reliable workforce. The Transformation Blueprint sets out Midlothian’s overall transformation programme. One of the aspects of transformation is the Workforce Strategy which is currently in development. The Audit Scotland report recommends that the Council should ensure it has sufficient capacity to deliver its corporate Workforce Strategy and detailed plans within agreed timescales. Page 4 of 268
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The Audit Scotland report also looked at digital transformation, noting that Midlothian Council had invested in technology, examples of this are the successful introduction of Microsoft 365, and the investment in technology to transform approaches to learning, teaching and assessment which has been also recognised with a Learning Places Scotland Award. These are two areas that are identified as evidence of good practice. The Audit Scotland report noted that the Hybrid Working Policy was introduced in 2023. This is seen as a significant benefit, but the report recommended that its impact on organisation performance and efficiency is reviewed. There was also acknowledgment that Midlothian Council is experiencing significant recruitment challenges and demonstrating innovative approaches to dealing with these. This is identified as good practice but the Audit Scotland report made a recommendation to formalise the Council’s approach to recruitment. The report noted that Midlothian is one of few places in Scotland where services are shared between different Local Authorities. The benefits of this decision are not yet fully articulated or quantified and there is a recommendation that the Council reviews this integration in the future but it was identified as another area of good practice. The Audit Scotland report also recognised that Midlothian Council has workforce data that it monitors to evaluate performance, and a recommendation is made that this is revised once the strategy is fully implanted. It is hoped this report is useful for driving improvement across the council. The Chair thanked Audit Scotland for the report and opened it up for questions. The Chair noted there is not yet sufficient data to determine the impact of the hybrid model of service delivery on the service users, and noted that this is an area that needs to be addressed. Audit Scotland agreed but noted that the impact on the service user was out with the scope of their report as its focus was to look at workforce planning and workforce strategy. The Chair also noted that in terms of shared services, the report states there are areas where the service delivery arrangements have to be captured and qualified as are the benefits of said arrangements and asked whether the wording on this section can be clarified. The Audit Scotland representative indicated the final version would be amended to clarify the wording on the section wording. All members of the committee were happy to endorse the report. Decision The Audit Committee noted the recommendations set out in the report. Action Page 5 of 268
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Report No. Report Title Submitted by: 5.2 Scottish Fiscal Commission: Fiscal Update Chief Financial Officer Outline of report and summary of discussion The Chief Financial Officer shared with the members of the Audit Committee the recommendations of the report from the Scottish Fiscal Commission ahead of the budget due to be presented at Council in December 2024. The report from the Scottish Fiscal Commission states how the services delivered by council would be impacted by the proposed Scottish Budget in the current financial year and in 2025/2026. The Chief Financial Officer highlighted section 1.43 in Page 62 of the report that states that while there is some information on how the 2024-25 Scottish Budget may change, there will still be significant uncertainty about the level of UK funding the Scottish Government receives until the UK Government presents its budget on 30 October. The Chief Financial Officer asked the committee to note that the UK budget will set the scene, with complex interaction with the Scottish Budget. It is clear that the Scottish Budget will be under significant pressure and that there are very different political circumstances affecting the 2025/26 budget compared to the one from 2024/25. The Chair thanked the Chief Financial Officer for the report and opened it up for questions. As there were no questions the Chair advised the recommendations of the report were noted by the Audit Committee. Decision The Audit Committee noted the recommendations set out in the report. Action Report No. Report Title Submitted by: 5.3 Internal Audit Work to September 2024 Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor presented this report. The purpose of this report is to provide members of the Audit Committee with details of the recent work carried out by Internal Audit and Assurance and the findings and recommended audit actions Page 6 of 268
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agreed by management to improve internal controls and governance arrangements. The Internal Audit Annual Plan 2023/24 was approved by the Audit Committee on 7 March 2023. Internal Audit has carried out work associated with the delivery of the plan to meet its objective of providing an opinion on the efficacy of the Council’s risk management, internal control and governance. The Chief Internal Auditor highlighted Appendix A and Appendix 1 on pages108- 109 on staff absence, and the commentary on the Bowles report on school capacity on Appendix 2, pages 111-120. Appendix 1 page 109 notes the audit of the operational system in place to monitor absence and ensure staff wellbeing in new working environments and capacity for service delivery. The report provided ample evidence of the capacity for service delivery but pointed out there are limited assurances for absence monitoring. The internal audit report made 4 medium and 4 low grade recommendations which were accepted by management. The key messages to management were the following: • Requirement to train management on how to monitor absence, review of the maximising attendance policy training materials and stress the need to report absence to Employment and Rewards on a timely basis • Review instances where staff have not clocked in and do not have absence reason and take action when appropriate implementing effective controls. • Absence management monitoring report to be updated to include teams from the Chief Executive’s service and consideration given to including absence monitoring stages that have been reached by employees • Documentation to be completed and appropriately retained for all sickness absences, and management to explore whether those documents can be stored centrally. The Chief Internal Auditor also referred to Appendix 2 and quoted the Bowles assurance report on school capacity, this was an independent review commissioned when the Dargavel state in Renfrewshire was built and resulted on a significant projected shortfall on school capacity. This report requested by Chief Executive Officer of Renfrewshire Council highlighted significant historical failings of leadership, oversight and risk management in relation to provision of school accommodation in Dargavel village. The scope of the assurance review conducted by the Chief Internal Auditor is to ensure Midlothian Council as the fastest growing Local Authority in Scotland Midlothian has an appropriate methodology to forecast pupil numbers across the local authority. The Chief Internal Auditor referred to the work completed so far on pages 112-113 of report and the conclusions listed on page 117 which lists improvements that can be made including the following key recommendations: • The catchment area for each development to be added to the Housing Data Main Schedule spreadsheet using the ARC GIS system before this is sent to education • Relevant officers should undertake an annual review of the new build/child house rations used in the annual pupil roll projections to ensure that they remain accurate and up to date and this should be reported to the CYPE board on an annual basis • The Roll Projections Procedure should be updated to include the determined percentage allocated for each primary year group • The frequency of the CYPP Board meetings should be reviewed and aligned with the Capital Asset and Management Board and include the minutes of any additional Page 7 of 268
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individual Project Board meetings on the Capital Asset and Management Board agenda (given the number and frequency of additional Boards required for large projects). Consider • Consideration should be given to incorporating ASN needs into the pupil roll projections to ensure that any additional class spaces required are identified. • The 2017-2047 Midlothian Learning Estate strategy approved in 2017 should be updated to include the correct pupil product ratios and the updated version should be published on the Council's website. • Consideration should be given to including a clause in S75 developer agreements to protect the Council against the risk of any unusual or unexpected increases in construction costs e.g. large increases in the price of materials or additional legislative requirements for climate change. • Following the external review of pupil forecasting, risks and ratings relating to school capacity / building should be reviewed and updated where applicable The Chair thanked the Chief Internal Auditor for the report and opened it up for questions. Members raised the matter of pupil rejections and expressed their concerns of a risk where housing developers who have been granted planning fall behind and what consequences this could have in terms of school projections. It was noted that the Council could be at risk of facilitating school rolls and building schools then ending up with places surplus to requirements. The Chief Internal Auditor stated it would be necessary to keep these projections under review to ensure they are up to date and added that the Council also has a plan for the future, and understands what the needs in terms of pupil places are if building goes ahead. This is something that needs to be under constant review to ensure the data is correct. Concerns were raised about the high level of staff absence in Health and Social Care, and it was asked to what extent could the lack of consistency in logging absence explain for this high level of absence, and to what extent it is possible to monitor those staff members working in hybrid conditions to ensure that they are working the hours they are contracted and the taxpayer pays for. The Chief Internal Auditor referred to the report, stating there are some recommendations to ensure reporting is accurate. It was admitted that there is a level of underreporting when it comes to absence but this is not felt to be substantial, and once training and monitoring elements are implemented this is expected to close the gap. In terms of hybrid workers, the Chief Internal Auditor explained that there is software in place for staff who work remotely to log on and off and report absence. While software solutions to monitor computer use exist these are not used at present. A member expressed that logging on and off is not too accurate and noted that other Councils are using tools such as keystroke monitoring, to keep track of the work completed by those working remotely. The Chief Internal Auditor advised that the member could discuss the matter with relevant individuals in the Council. The Chair referred to section 2.1, page 112 of the report in terms of the Council needing to have the appropriate methodology to forecast pupil numbers and asked if they always had the appropriate methodology. The Chair stated that in the case of Shawfair, the figures are very different now from what they were in the past. Furthermore, the developer contribution agreement was signed many years ago and does not tally with what is needed now and may result in the Council having to provide money to fund additional school places. The Chair asked if there is room for modifying the working on the developer contribution agreement to ensure the Council does not take all the risk. The Chair also noted that trying to determine how Page 8 of 268
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many school places are needed when an estate is planned takes some guesswork as to who will buy the houses. For example, the Brixwold state in Bonnyrigg, was popular with older house buyers moving out of Edinburgh due to rising house prices there, whereas homes in Hopefield were overwhelmingly occupied by young families with children, which resulted in Burnbrae Primary needing additional accommodation. Given these circumstances there could be a risk of the agreements in place falling short, so the Chair asked whether future Section 75 legal agreements may require the developer to build the school rather than give a contribution, or whether it would be better than this contribution is brought in line with the most up to date thinking in terms of pupil forecasts. The Chief Internal Auditor advised that they looked at the current processes in terms of the audit, and while there has been improvement in the processes it was also noted that there are also changes in societal trends to consider. During the COVID pandemic, there was an influx of people moving in from Edinburgh into Midlothian as people looked for larger accommodation due to them working from home. This is not the case anymore and the trend may end as a result, which would mean the larger houses are mostly bought by families. The Council monitors these trends to ensure they are aware of what may be affecting pupil populations in the area. In terms of the legal agreement, the Council has tools in place to reduce the financial risk as much as possible. While passing more of the risk on to the developer is a possibility, it may open a discussion as to what it can and cannot be done with the developers. The Chief Internal Auditor expressed doubts there is a way to entirely remove the risk. The Chair agreed, noting that if the risk is entirely transferred to the developer it may result in the companies going to other Local Authorities. The Chair stated the Committee was keen to see these recommendations implemented and for more concrete information on how the Council could transfer some of the risks across the board. Decision The Audit Committee noted the recommendations set out in the report. Action Report No. Report Title Submitted by: 5.4 Audit Committee Annual / End of Term Report 2023/24 Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor advised that the purpose of annual report for the Audit Committee is to look at how the Committee has performed against its remit. The Chief Internal Auditor thanked the Committee members for completing the questionnaires. The Chief Internal Auditor pointed at section 4.2 in the report that describes areas for improvement and 3 were highlighted: Page 9 of 268
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• Utilise the CIPFA Skills and Knowledge toolkit responses from all members of the Committee to identify development needs and any requirements for the consideration of any potential Independent Member recruitment, formulate a plan for any development needs. • Schedule a recruitment, selection and appointment process for independent members of the Audit Committee within the next year. • Move to 4 scheduled meeting of the Audit Committee each year from the 7 meetings currently scheduled, whilst retaining the capability to call further meetings when required. The Chair noted the report and opened it up for questions. Members asked about the meeting schedule and whether the additional Audit Committee meeting scheduled for 29/10/2024 would go ahead. The Chief Internal Auditor stated that it should be possible to cancel the 29 October meeting. Going forwards the recommendation is that the committee will meet 4 times a year, down from the current 7 meetings a year. Decision The Audit Committee noted the recommendations set out in the report. Action Meeting schedule to be revised and meeting October 2024 to be cancelled Report No. Report Title Submitted by: 5.5 Risk Management Update – Strategic Risk Profile Quarter 1 2024/25 Chief Officer Place Outline of report and summary of discussion The Chief Officer Place presented this report. The purpose of this report is to provide Audit Committee with an update on the risk landscape and for the Quarter 1 period April 2024 to 30th June 2024 and the responses Midlothian Council has implemented during this period to respond to the current risk climate. The Chief Officer Place stated that the existing risks and evaluations remain in place from the previous quarter and that there are no new risks added for this period. However, as per request from the Audit Committee, the strategic opportunities section of the strategic risk profile has been updated with specific projects for members’ attention. These are referenced in section 3.9 and are the five capital projects of Housing, Transport and Net Zero Infrastructure, Children, Young People and Partnership Learning Estates Programme (primary and secondary) and Regeneration. The Chair thanked the Chief Officer Place for the report and opened it up for questions. The Chair asked why the risks listed to cost of living are currently set as medium risk, as are the ones pertaining to Care at Home. The Chief Officer Place advised that steps have been taken to reduce the cost of Care at Home, and that there are also workforce problems. The Chair expressed surprise that cost of living has not Page 10 of 268
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been upgraded to a critical risk as it is likely to be one of the largest challenges nationwide this winter as a result of decisions taken by the government. The Chief Officer Place stated that the risk impact scores for Care at Home and cost of living are as high as they can be. While it would be possible to reconsider the scores with those particular risk owners the Chief Officer Place is satisfied that the likelihood is not as considerable due to controls actions taken by the Local Authority to mitigate the risk. The Chair recommended that the risks associated with Care at Home and cost of living are revisited with each area’s risk owners to ensure they are sitting at the right risk category. Members also referred to page 180 of the report which lists contractor issues at Vogrie and Hillend and asked for clarification on what these issues are and whether there would be scope for litigation. The Chief Officer Place clarified that this risk is in terms of the timeline of delivery of a service as the contractor is taking longer than stipulated to complete the work rather than having detrimental effects on the project as a whole. The scope of the contract in Vogrie is to build an accessible toilet for disabled visitors to the Country Park. The Executive Director Place explained that for Hillend that the legal option is being explored internally and remains in progress but in terms of liability it is yet to be determined and conversations remain with the public utility company. Decision The Audit Committee noted the recommendations set out in the report. Action Chief Officer Place – Scores for cost of living and Care at Home to be revisited with individual risk owners. 6. Private Reports No items for discussion 7. Date of Next Meeting The next meeting will be held on Monday 25 November 2024 at 11am as the Tuesday 29 October 2024 meeting has been cancelled, in line with the Committee’s new agreed meeting frequency schedule. Councillor McEwan will take over as Chair of the Audit Committee for a period of one year as per procedure. The meeting terminated at 14.33. Page 11 of 268
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Audit Committee Action Log Audit Committee Monday 25 November Item No 4.2 No Date of Meeting Item No and Title Action Action Owner Expected completion date Comments 1 5.1 Treasury management 06/12/2022 Session with members to be organised with regards to Responsible treasury management/ethical issues. Chief Financial Officer Ongoing Carry forward, paper coming forward regarding CSG and ethical depositing coming later in the year. 2 5.5 Risk Management Update – Strategic Risk Profile Quarter 1 2024/25 30/09/2024 Review report to determine if risk scores linked to cost of living and Care at Home need to be upgraded Chief Officer Place Dec 2024 in line with Q2 risk reporting Page 13 of 268
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102 West Port Edinburgh EH3 9DN 8 Nelson Mandela Place Glasgow G2 1BT The Green House Beechwood Business Park North Inverness IV2 3BL T: 0131 625 1500 E: info@audit-scotland.gov.uk www.audit-scotland.gov.uk Audit Committee 25 November 2024 Midlothian Council Audit of 2023/24 annual accounts Independent auditor's report 1. My audit work on the 2023/24 annual accounts is now substantially complete. Subject to receipt of a revised set of annual accounts for final review, I anticipate being able to issue unmodified audit opinions in the independent auditor's report on 25 November 2024 (the proposed report is attached at Appendix A). Annual Audit Report 2. Under International Standards on Auditing in the UK, I report specific matters arising from the audit of the annual accounts to those charged with governance of Midlothian Council in sufficient time to enable appropriate action. For Midlothian Council, those charged with governance is the Audit Committee. I present for the committee’s consideration my draft Annual Audit Report on the 2023/24 audit. The section headed "Significant findings and key audit matters" sets out the issues identified in respect of the annual accounts. 3. The report also sets out conclusions on the wider scope areas that frame public audit as set out in the Code of Audit Practice. 4. This report will be issued in final form after the audit of the annual accounts has been completed. Unadjusted misstatements 5. I also report to those charged with governance all unadjusted misstatements in the annual accounts which I have identified during the course of my audit, other than those of a trivial nature, and request that these misstatements be corrected. 6. I have no unadjusted misstatements to be corrected. Fraud, subsequent events, and compliance with laws and regulations 7. In presenting this report to the Audit Committee I seek confirmation from those charged with governance of any instances of any actual, suspected, or alleged fraud; any subsequent events that have occurred since the date of the financial statements; or material non-compliance with laws and regulations affecting the entity that should be brought to my attention. Representations from Section 95 Officer 8. As part of the completion of our audit, I am seeking written representations from the Section 95 Officer on aspects of the annual accounts, including the judgements and estimates made. Audit Committee Monday 25 November 2024 Item No 5.1 Page 15 of 268
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9. A draft letter of representation is attached at Appendix B. This should be signed and returned to me by the Section 95 Officer with the signed annual accounts prior to the independent auditor’s report being signed. Page 16 of 268
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Appendix A: Proposed Independent Auditor’s Report Independent auditor’s report to the members of Midlothian Council and the Accounts Commission Reporting on the audit of the financial statements Opinion on financial statements I certify that I have audited the financial statements in the annual accounts of Midlothian Council and its group for the year ended 31 March 2024 under Part VII of the Local Government (Scotland) Act 1973. The financial statements comprise the Group and Council Comprehensive Income and Expenditure Statement, Movement in Reserves Statement, Balance Sheet, and Cash Flow Statement, the council-only Housing Revenue Account, the Movement in the Housing Revenue Account, the Council Tax Income Account, and the Non-Domestic Rate Account and notes to the financial statements, including material accounting policy information. The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international accounting standards, as interpreted and adapted by the Code of Practice on Local Authority Accounting in the United Kingdom 2023/24 (the 2023/24 Code). In my opinion the accompanying financial statements: • give a true and fair view of the state of affairs of the council and its group as at 31 March 2024 and of the income and expenditure of the council and its group for the year then ended; • have been properly prepared in accordance with UK adopted international accounting standards, as interpreted and adapted by the 2023/24 Code; and • have been prepared in accordance with the requirements of the Local Government (Scotland) Act 1973, The Local Authority Accounts (Scotland) Regulations 2014, and the Local Government in Scotland Act 2003. Basis for opinion I conducted my audit in accordance with applicable law and International Standards on Auditing (UK) (ISAs (UK)), as required by the Code of Audit Practice approved by the Accounts Commission for Scotland. My responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of my report. I was appointed by the Accounts Commission on 5 June 2023. My period of appointment is five years, covering 2022/23 to 2026/27. I am independent of the council and its group in accordance with the ethical requirements that are relevant to my audit of the financial statements in the UK including the Financial Reporting Council’s Ethical Standard, and I have fulfilled my other ethical responsibilities in accordance with these requirements. Non-audit services prohibited by the Ethical Standard were not provided to the council. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion. Conclusions relating to going concern basis of accounting I have concluded that the use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Based on the work I have performed, I have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the ability of the council and its group to continue to adopt the going concern basis of accounting for a period of at least twelve months from when the financial statements are authorised for issue. Page 17 of 268
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These conclusions are not intended to, nor do they, provide assurance on the current or future financial sustainability of the council and its group. However, I report on the council’s arrangements for financial sustainability in a separate Annual Audit Report available from the Audit Scotland website. Risks of material misstatement I report in my Annual Audit Report the most significant assessed risks of material misstatement that I identified and my judgements thereon. Responsibilities of the Chief Financial Officer and Audit Committee for the financial statements As explained more fully in the Statement of Responsibilities, the Chief Financial Officer is responsible for the preparation of financial statements that give a true and fair view in accordance with the financial reporting framework, and for such internal control as the Chief Financial Officer determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Chief Financial Officer is responsible for assessing the ability of the council and its group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless there is an intention to discontinue the operations of the council and its group. The audit committee is responsible for overseeing the financial reporting process. Auditor’s responsibilities for the audit of the financial statements My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of users taken on the basis of these financial statements. Irregularities, including fraud, are instances of non-compliance with laws and regulations. I design procedures in line with my responsibilities outlined above to detect material misstatements in respect of irregularities, including fraud. Procedures include: • using my understanding of the local government sector to identify that the Local Government (Scotland) Act 1973, The Local Authority Accounts (Scotland) Regulations 2014, and the Local Government in Scotland Act 2003 are significant in the context of the council and its group; • inquiring of the Chief Financial Officer as to other laws or regulations that may be expected to have a fundamental effect on the operations of the council and its group; • inquiring of the Chief Financial Officer concerning the policies and procedures of the councils and its group regarding compliance with the applicable legal and regulatory framework; • discussions among my audit team on the susceptibility of the financial statements to material misstatement, including how fraud might occur; and • considering whether the audit team collectively has the appropriate competence and capabilities to identify or recognise non-compliance with laws and regulations. Page 18 of 268
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The extent to which my procedures are capable of detecting irregularities, including fraud, is affected by the inherent difficulty in detecting irregularities, the effectiveness of the council’s controls, and the nature, timing and extent of the audit procedures performed. Irregularities that result from fraud are inherently more difficult to detect than irregularities that result from error as fraud may involve collusion, intentional omissions, misrepresentations, or the override of internal control. The capability of the audit to detect fraud and other irregularities depends on factors such as the skilfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved. A further description of the auditor’s responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website www.frc.org.uk/auditorsresponsibilities. This description forms part of my auditor’s report. Reporting on other requirements Opinion prescribed by the Accounts Commission on the audited parts of the Remuneration Report I have audited the parts of the Remuneration Report described as audited. In my opinion, the audited parts of the Remuneration Report have been properly prepared in accordance with The Local Authority Accounts (Scotland) Regulations 2014. Other information The Chief Financial Officer is responsible for the other information in the annual accounts. The other information comprises the Management Commentary, Annual Governance Statement, Statement of Responsibilities and the unaudited parts of the Remuneration Report. My responsibility is to read all the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or my knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If I identify such material inconsistencies or apparent material misstatements, I am required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work I have performed, I conclude that there is a material misstatement of this other information, I am required to report that fact. I have nothing to report in this regard. My opinion on the financial statements does not cover the other information and I do not express any form of assurance conclusion thereon except on the Management Commentary and Annual Governance Statement to the extent explicitly stated in the following opinions prescribed by the Accounts Commission. Opinions prescribed by the Accounts Commission on the Management Commentary and Annual Governance Statement In my opinion, based on the work undertaken in the course of the audit: • the information given in the Management Commentary for the financial year for which the financial statements are prepared is consistent with the financial statements and that report has been prepared in accordance with statutory guidance issued under the Local Government in Scotland Act 2003; and • the information given in the Annual Governance Statement for the financial year for which the financial statements are prepared is consistent with the financial statements and that report has been prepared in accordance with the Delivering Good Governance in Local Government: Framework (2016). Page 19 of 268
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Matters on which I am required to report by exception I am required by the Accounts Commission to report to you if, in my opinion: • adequate accounting records have not been kept; or • the financial statements and the audited parts of the Remuneration Report are not in agreement with the accounting records; or • I have not received all the information and explanations I require for my audit. I have nothing to report in respect of these matters. Conclusions on wider scope responsibilities In addition to my responsibilities for the annual accounts, my conclusions on the wider scope responsibilities specified in the Code of Audit Practice, including those in respect of Best Value, are set out in my Annual Audit Report. Use of my report This report is made solely to the parties to whom it is addressed in accordance with Part VII of the Local Government (Scotland) Act 1973 and for no other purpose. In accordance with paragraph 108 of the Code of Audit Practice, I do not undertake to have responsibilities to members or officers, in their individual capacities, or to third parties. Claire Gardiner CPFA Audit Director Audit Scotland 102 West Port Edinburgh EH3 9DN Appendix B: Letter of Representation (ISA 580) - to be reproduced on client's letterhead Claire Gardiner CPFA, Audit Director Audit Scotland 4th Floor 102 West Port Page 20 of 268
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Edinburgh EH3 9DN Dear Claire, Midlothian Council Annual Accounts 2023/24 1. This representation letter is provided about your audit of the annual accounts of Midlothian Council and its group, for the year ended 31 March 2024 for the purpose of expressing an opinion as to whether the financial statements give a true and fair view and have been properly prepared, and for expressing other opinions on the Remuneration Report, Management Commentary, and Annual Governance Statement. 2. I confirm to the best of my knowledge and belief and having made appropriate enquiries of the Chief Executive and Corporate Management Team, the following representations given to you in connection with your audit of Midlothian Council’s annual accounts for the year ended 31 March 2024. General 3. Midlothian Council and I have fulfilled our statutory responsibilities for the preparation of the 2023/24 annual accounts. All the accounting records, documentation, and other matters which I am aware are relevant to the preparation of the annual accounts have been made available to you for the purposes of your audit. All transactions undertaken by Midlothian Council have been recorded in the accounting records and are properly reflected in the financial statements. Financial Reporting Framework 4. The annual accounts have been prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom 2023/24 (2023/24 accounting code), and the requirements of the Local Government (Scotland) Act 1973, the Local Government in Scotland Act 2003, and The Local Authority Accounts (Scotland) Regulations 2014. 5. In accordance with the 2014 Regulations, I have ensured that the financial statements give a true and fair view of the financial position of the Midlothian Council and its Group at 31 March 2024 and the transactions for 2023/24. Accounting Policies and Estimates 6. All material accounting policies applied are as shown in the notes to the financial statements. The accounting policies are determined by the 2023/24 accounting code where applicable. All accounting policies applied are appropriate to Midlothian Council’s circumstances and have been consistently applied. 7. The significant assumptions used in making accounting estimates are reasonable and properly reflected in the financial statements. Judgements used in making estimates have been based on the latest available, reliable information. Estimates have been revised where there are changes in the circumstances on which the original estimate was based or as a result of new information or experience. Page 21 of 268
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Going Concern Basis of Accounting 8. I have assessed Midlothian Council’s ability to continue to use the going concern basis of accounting and have concluded that it is appropriate. I am not aware of any material uncertainties that may cast significant doubt on Midlothian Council’s ability to continue to adopt the going concern basis of accounting. Assets 9. Where a rolling programme of asset valuations has been used, I have satisfied myself that the carrying amount of assets at 31 March 2024 does not differ materially from that which would be determined if a revaluation had been carried out at that date. 10. I carried out an assessment at 31 March 2024 as to whether there is any indication that an asset may be impaired and have recognised any impairment losses identified. 11. I have provided you with all information of which I am aware regarding any valuation exercises carried out after 31 March 2024. 12. There are no plans or intentions that are likely to affect the carrying value or classification of the assets recognised within the financial statements. 13. Owned assets are free from any lien, encumbrance or charge except as disclosed in the financial statements. Liabilities 14. All liabilities at 31 March 2024 of which I am aware have been reported in the financial statements. 15. Provisions have been recognised in the financial statements for all liabilities of uncertain timing or amount at 31 March 2024 of which I am aware where the conditions specified in the 2023/24 accounting code have been met. The amount recognised as a provision is the best estimate of the expenditure likely to be required to settle the obligation at 31 March 2024. Where the effect of the time value of money is material, the amount of the provision has been discounted to the present value of the expected payments. 16. Provisions recognised in previous years have been reviewed and adjusted, where appropriate, to reflect the best estimate at 31 March 2024 or to reflect material changes in the assumptions underlying the calculations of the cash flows. 17. The accrual recognised in the financial statements for annual leave untaken by 31 March 2024 has been estimated on a reasonable basis. 18. The pension assumptions made by the actuary in the IAS 19 report for Midlothian Council have been reviewed and I confirm that they are consistent with management's own view. 19. There are no plans or intentions that are likely to affect the carrying value or classification of the liabilities recognised in the financial statements. Contingent Liabilities 20. There are no significant contingent liabilities, other than those disclosed in Note 36 to the financial statements, arising either under formal agreement or through formal undertakings requiring disclosure in the accounts. All known contingent liabilities have been fully and properly disclosed in accordance with the 2023/24 accounting code and IAS 37. Litigation and Claims Page 22 of 268
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21. All known actual or possible legal claims have been disclosed to you and have been accounted for and disclosed in the financial statements in accordance with the 2023/24 accounting code. Fraud 22. I understand my responsibilities for the design, implementation, and maintenance of internal control to prevent fraud and I believe I have appropriately fulfilled those responsibilities. 23. I have provided you with all information in relation to: • my assessment of the risk that the financial statements may be materially misstated because of fraud, • any allegations of fraud or suspected fraud affecting the financial statements, and • fraud or suspected fraud that I am aware of involving management, employees who have a significant role in internal control, or others that could have a material effect on the financial statements. Laws and Regulations 24. I have disclosed to you all known instances of non-compliance or suspected non- compliance with laws and regulations whose effects should be considered when preparing financial statements. Related Party Transactions 25. All material transactions with related parties have been appropriately accounted for and disclosed in the financial statements in accordance with the 2023/24 accounting code. I have made available to you the identity of all the Midlothian Council’s related parties and all the related party relationships and transactions of which I am aware. Remuneration Report 26. The Remuneration Report has been prepared in accordance with the Local Authority Accounts (Scotland) Regulations 2014, and all required information of which I am aware has been provided to you. Management Commentary 27. I confirm that the Management Commentary has been prepared in accordance with the statutory guidance and the information is consistent with the financial statements. Corporate Governance 28. I confirm that Midlothian Council has undertaken a review of the system of internal control during 2023/24 to establish the extent to which it complies with proper practices set out in the Delivering Good Governance in Local Government: Framework 2016. I have disclosed to you all deficiencies in internal control identified from this review or of which I am otherwise aware. 29. I confirm that the Annual Governance Statement has been prepared in accordance with the Delivering Good Governance in Local Government: Framework 2016 and the information is consistent with the financial statements. There have been no changes in the corporate governance arrangements or issues identified, since 31 March 2024, which require to be reflected. Page 23 of 268
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Group Accounts 30. I have identified all the other entities in which Midlothian Council has a material interest and have classified and accounted for them in accordance with the 2023/24 accounting code. Any significant issues with the financial statements of group entities, including any qualified audit opinions, have been advised to you. Events Subsequent to the Date of the Balance Sheet 31. All events subsequent to 31 March 2024 for which the 2023/24 accounting code requires adjustment or disclosure have been adjusted or disclosed. Yours sincerely David Gladwin Section 95 Officer Page 24 of 268
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Prepared for the Members of Midlothian Council and the Controller of Audit November 2024 Midlothian Council 2023/24 Annual Audit Report Page 25 of 268
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Midlothian Council 2023/24 Annual Audit Report | 2 Contents Key messages 3 Introduction 5 1. Audit of 2023/24 annual accounts 7 2. Financial management 17 3. Financial sustainability 25 4. Vision, leadership and governance 28 5. Best Value 30 6. Use of resources to improve outcomes 34 Appendix 1. Action plan 2023/24 39 Page 26 of 268
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Key messages | 3 Key messages 2023/24 annual accounts 1 Audit opinions on the annual accounts of the council and its group are unmodified, i.e. the financial statements and related reports are free from material misstatement. 2 The unaudited annual accounts were provided within the agreed timetable and were of a good standard. 3 Management made adjustments of £33 million to the annual accounts. The most significant adjustments related to the re-measurement of the value of other buildings (£22 million) and Midlothian Energy Limited Shareholding in Group Share of net assets (£6 million) within the Group accounts. Financial management 4 Midlothian Council has effective and appropriate arrangements to secure sound financial management. 5 During 2023/24 the Council managed its budget and ended the year with a net underspend of £0.1 million. 6 The level of usable reserves held by Midlothian Council decreased from £112 million in 2022/23 (including the service concessions opening balance adjustment of £20 million) to £101 million in 2023/24. The usable reserves balance of £101 million includes General Fund earmarked reserves of £37 million and ring fenced HRA, Capital Fund and Repairs and Renewals Fund reserves of £55 million, leaving only £9 million of non-earmarked reserves. 7 Total General Services capital expenditure in 2023/24 was £47 million representing an increase of £24 million on 2022/23 capital spend. Financial sustainability 8 The latest 2024/25 budget monitoring report reported to the Council in October 2024 is projecting an overspend of £2.2 million against a revised budget of £316 million, and a General Fund reserve balance of £21.5 million of which £6.8 million is non- earmarked. 9 The Council recently, considered the five-year Medium Term Financial Strategy which is showing a budget gap of £21 million to 2028/29. Page 27 of 268
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Key messages | 4 10 The Council is aware that it faces heightened financial challenges, and transformation is essential in delivering balanced budgets and financially sustainable services. Vision, leadership and governance 11 Midlothian Council continues to have governance arrangements that are appropriate and operating effectively, that support effective scrutiny, challenge and informed decision making. Best Value 12 Midlothian Council has an appropriate and effective best value framework in place. 13 Our thematic review of Workforce Innovation found the development of an organisational workforce strategy is ongoing and this will align with the council’s priorities as set out in the Transformation Blueprint. Our full Best Value thematic report was presented to the Council in September 2024 and identified examples of good practice and areas for improvement. 14 The Council has made good progress against Best Value improvement actions reported in our Best Value Assurance Report 2019 with only one action remaining outstanding. Use of resources to improve outcomes 15 The Best Value framework supports the delivery of continuous improvements in priority services. 16 Midlothian Council has a Performance Management Framework in place and reports on performance utilising balanced scorecard, quarterly and annual reporting, progress reports and local government benchmarks. There is scope for improvement to ensure key messages are clear and performance is mapped to outcomes. 17 Midlothian Council has satisfactory arrangements for the preparation and publication of Statutory Performance Information (SPIs). Page 28 of 268
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Introduction | 5 Introduction 1. This report summarises the findings from the 2023/24 annual audit of Midlothian Council (the Council). The scope of the audit was set out in an Annual Audit Plan presented to the 18 March 2024 meeting of the Audit Committee. This Annual Audit Report comprises: • significant matters arising from the audit of Midlothian Council’s annual accounts • conclusions on Midlothian Council’s performance in meeting its Best Value duties • conclusions on the following wider scope areas that frame public audit as set out in the Code of Audit Practice 2021: o Financial Management o Financial Sustainability o Vision, Leadership, and Governance o Use of Resources to Improve Outcomes. 2. This report is addressed to the board of Midlothian Council and the Controller of Audit and will be published on Audit Scotland's website www.audit- scotland.gov.uk in due course. Audit appointment 3. Claire Gardiner has been appointed by the Accounts Commission as auditor of the Council for the period from 2022/23 until 2026/27. 4. We would like to thank Councillors, Audit Committee members, senior management, and other staff, particularly those in finance and estates, for their cooperation and assistance in this year’s audit and we look forward to working together constructively over the remainder of the five-year appointment. Responsibilities and reporting 5. The Council has primary responsibility for ensuring the proper financial stewardship of public funds. This includes preparing annual accounts that are in accordance with proper accounting practices. The Council is also responsible for compliance with legislation and putting arrangements in place for governance and propriety that enable it to successfully deliver its objectives. Page 29 of 268
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Introduction | 6 6. My responsibilities as the independent auditor are established by the Local Government (Scotland) Act 1973, the Code of Audit Practice 2021 and supplementary guidance, and International Standards on Auditing in the UK. 7. Weaknesses or risks identified are only those which have come to my attention during my team’s normal audit work and may not be all that exist. Communicating these does not absolve management of the Council from its responsibility to address the issues raised and to maintain adequate systems of control. 8. This report contains an agreed action plan at Appendix 1. It sets out specific recommendations, the responsible officers, and dates for implementation. Auditor Independence 9. We can confirm that we comply with the Financial Reporting Council’s Ethical Standard. We can also confirm that we have not undertaken any non-audit related services and therefore the 2023/24 audit fee of £289,950 as set out in our 2023/24 Annual Audit Plan remains unchanged. We are not aware of any relationships that could compromise our objectivity and independence. 10. The annual audit adds value to Midlothian Council by: • identifying and providing insight on significant risks, and making clear and relevant recommendations • providing clear and focused conclusions on the appropriateness, effectiveness and impact of corporate governance, arrangements to ensure the best use of resources and financial sustainability. • sharing intelligence and good practice identified. Page 30 of 268
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1. Audit of 2023/24 annual accounts | 7 1. Audit of 2023/24 annual accounts Public bodies are required to prepare annual accounts comprising financial statements and other related reports. These are principal means of accounting for the stewardship public funds. Main judgements Audit opinions on the annual accounts of the council and its group are unmodified, i.e. the financial statements and related reports are free from material misstatement. The unaudited annual accounts were provided within the agreed timetable and were of a good standard. Management made adjustments of £33 million to the annual accounts. The most significant adjustments related to the re-measurement of the value of other buildings (£22 million) and Midlothian Energy Limited Shareholding in Group Share of net assets (£6 million) within the Group accounts. Audit opinions on the annual accounts are unmodified 11. The Audit Committee approved the annual accounts for the Council and its group for the year ended 31 March 2024 on 25 November 2024. As reported in the independent auditor’s report, in my opinion as the appointed auditor: • the financial statements give a true and fair view and were properly prepared in accordance with the financial reporting framework • the audited part of the remuneration report was prepared in accordance with The Local Authority Accounts (Scotland) Regulations 2014. • the management commentary and annual governance statement were consistent with the financial statements and properly prepared in accordance with the applicable requirements. The unaudited annual accounts were received in line with the agreed audit timetable 12. The unaudited annual accounts were received in line with the agreed audit timetable on 25 June 2024. Management and finance staff provided good Page 31 of 268
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1. Audit of 2023/24 annual accounts | 8 support to the audit team enabling the audit to be completed by the agreed deadline of 25 November 2024. Overall materiality was assessed on receipt of the unaudited annual accounts as £11 million 13. The concept of materiality is applied by auditors to determine whether misstatements identified during the audit could reasonably be expected to influence the economic decisions of users of the financial statements, and hence impact their opinion set out in the independent auditor’s report. Auditors set a monetary threshold when considering materiality, although some issues may be considered material by their nature. It is ultimately a matter of the auditor’s professional judgement. 14. Our initial assessment of materiality was carried out during the risk assessment phase of the audit. This was reviewed and revised on receipt of the unaudited annual accounts and is summarised in Exhibit 1. Exhibit 1 Materiality values Materiality level Revised Amount Overall materiality £11 million Performance materiality £6.6 million Reporting threshold £0.40 million Source: Audit Scotland 15. The overall materiality threshold for the audit of the annual accounts of the Council was set with reference to gross expenditure, which was judged as the figure most relevant to the users of the financial statements. 16. Performance materiality is used by auditors when undertaking work on individual areas of the financial statements. It is a lower materiality threshold, set to reduce the probability of aggregated misstatements exceeding overall materiality. Performance materiality was set at 60% of overall materiality, reflecting our risk assessment which was informed by the level of errors in prior years and the control environment in place at the Council. 17. It is my responsibility to request that all misstatements, other than those below the reporting threshold are corrected, although the final decision on making the correction lies with those charged with governance. Page 32 of 268
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1. Audit of 2023/24 annual accounts | 9 Significant findings and key audit matters 18. Under ISA (UK) 260, we communicate significant findings from the audit to the council, including our view about the qualitative aspects of the Council’s accounting practices. 19. The Code of Audit Practice also requires me to highlight key audit matters, which are defined in ISA (UK) 701 as those matters judged to be of most significance. 20. The significant findings including key audit matters, are summarised in Exhibit 2. Exhibit 2 Significant findings and key audit matters from the audit of the annual accounts Issue Resolution 1.Non- current assets condition surveys In 2023/24 the Council performed a full valuation of schools and miscellaneous depreciated replacement cost properties in line with its revaluation policy. The condition survey ratings for buildings held on the non- current asset register were considered in preparing the valuation estimates. Several condition surveys were updated during 2023/24 and were allocated reduced ratings. The surveys were not finalised until after the year end and provided further evidence of the condition of the revalued buildings at 31 March 2024. The revised condition ratings should have been considered by the valuer and the 2023/24 calculations updated to ensure the values included in the financial statements reflected the conditions and were materially correct. This resulted in an estimation error of £19 million in the unaudited accounts. Management revised the valuation of other buildings and we are satisfied that the net book value of £557 million included in the audited accounts is not materially misstated. Recommendation 1 (refer Appendix 1) The most up to date condition ratings should be applied to all buildings at the date of valuation. 2.Non-current assets council dwellings The Council undertook a full valuation of its council dwellings stock in 2020/21. The next full valuation is already underway and will be completed in 2024/25 in line with its revaluation policy. This valuation is based on specialist and management assumptions using the 'beacon method' in accordance with mandatory guidance from the In 2023/24 the discount factor applied was 67%. We considered the discount factor against guidance, practices in place at other councils and discount factors in comparable locations. We found the estimated discount factor to be reasonable. Page 33 of 268
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1. Audit of 2023/24 annual accounts | 10 Issue Resolution Local Authority (Scotland) Accounts Advisory Committee (LASAAC). In accordance with good practice, the Council has updated the valuation in the intervening years where it has been estimated to increase or decrease significantly. Determining the valuation estimates involved applying discount factors to reflect the difference between social and market rents. However, guidance for valuers – ‘stock valuation for resource accounting’ published in 2016 by department for communities and local government highlights that the discount factor for social housing should be determined with reference to the relationship between rents and yield in the private residential sector and the public / socially rented sector. We found that the rent yield factor had not been considered when valuing council dwellings in Midlothian. From discussion with the valuer this is due to a lack of evidence from property sales in the area to inform the estimate. We also identified an error of £1 million in the calculation of the valuation of council dwellings due to applying the incorrect Building Cost Information Service index. We are satisfied that the Net book value of council dwellings in the audited accounts of £496 million is not materially misstated. Management have agreed to consider the rent yield factor for the 2024/25 valuation. Recommendation 2 (refer Appendix 1) To fully comply with Guidance for valuers – ‘stock valuation for resource accounting’ published in 2016 by department for communities and local government, Management should consider the rent yield adjustment in valuations of council dwellings. 3. Non- current assets – mixed use properties The Council holds multiple buildings which are multi-purpose e.g. a building is used as an office and a store. Where there is a mixed use building it adds complexities to valuations. BCIS codes vary depending on the use of the building and the Council base the BCIS code applied on the primary function of the building. As part of our testing in 2023/24 we identified two mixed use properties which had been allocated BCIS codes based on the secondary function which resulted in an over valuation. We have tested a significant proportion of mixed use properties and identified an overstatement of £1 million. The untested balance is below materiality and therefore we are satisfied that the amounts in the accounts are not materially misstated 4. Holiday pay accrual Audit testing identified an error in the calculation of the accumulated absences accrual. Expenditure in the CIES and short-term creditors in the balance sheet were understated by £3 million. Management revised the calculation and the correct figure of £9 million is included in the audited accounts. Page 34 of 268
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1. Audit of 2023/24 annual accounts | 11 Issue Resolution 5. Group accounts The share of associates and joint ventures in the group balance sheet in the unaudited accounts includes the total value of £6 million of long-term investments in MEL in addition to the council’s share of the investments of £4 million. IFRS11 requires the value of the investment to be included at initial cost and then to be adjusted by the change in Midlothian Council’s share of the associates and joint venture’s net assets. The share of associates and joint ventures in the group balance sheet is therefore overstated by £6 million. Net expenditure in the CIES is understated by £6 million. The value of the investment the Council holds in the Single Entity Balance Sheet is accurate and unadjusted. Management revised the group balance sheet and the audited accounts correctly show the Council’s share of investments in MEL as £4 million. 6. Non-domestic rate account Within the non-domestic rate account the amount distributed to Midlothian Council from the non- domestic rate pool was incorrectly disclosed at £32 million due to a typing error. The figure should have been £35 million. Debtors and creditors are both understated by £3 million. We are satisfied that management adjusted for this error in the audited accounts. 7. CIES– classification and presentational errors Our audit work identified some areas where transactions or balances were incorrectly disclosed within the primary financial statements and notes to the accounts: • Within the notes to the accounts capital commitments were understated by £30 million. The figure has been revised to £70 million. • Within the CIES £5 million net expenditure was reclassified between Corporate solutions and other services. • Within note 23 to the accounts £1 million was reclassified between other trade debtors and other public sector bodies debtors. • Within note 19 to the accounts £1 million was reclassified between financial instruments and non-financial instruments. We are satisfied that management have addressed all significant misclassifications and presentational errors within the primary financial statements and notes to the accounts. Page 35 of 268
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1. Audit of 2023/24 annual accounts | 12 Issue Resolution • Within note 34 to the accounts, transactions relating to post-employment benefits, £9 million was transferred between actuarial losses and other post-employment benefits charged to the surplus or deficit on the provision of services. Source: Audit Scotland Audit work responded to the risks of material misstatement we identified in the annual accounts 21. We obtained audit assurances over the identified significant risks of material misstatement in the annual accounts. Exhibit 3 sets out the significant risks of material misstatement to the financial statements identified in my 2023/24 Annual Audit Plan. It also summarises the further audit procedures performed during the year to obtain assurances over these risks and the conclusions from the work completed. Exhibit 3 Significant risks of material misstatement in the annual accounts Audit risk Assurance procedure Results and conclusions 1. Risk of material misstatement due to fraud caused by management override of controls As stated in International Standard on Auditing (UK) 240, management is in a unique position to perpetrate fraud because of management’s ability to override controls that otherwise appear to be operating effectively. • Assess the design and implementation of controls over journal entry processing. • Make enquiries of individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries and other adjustments. • Test journals at the year- end and post-closing entries and focus on significant risk areas. • Consider the need to test journal entries and other adjustments during the period. • Evaluate significant transactions outside the normal course of business. Our testing of journals, year- end transactions, accruals and prepayments did not identify any incidents of management override of controls. We did not identify any unusual journal activity. Our assessment of the adequacy of controls in place for identifying and disclosing related party relationships and transactions in the financial statements did not highlight any weaknesses. The methods and assumptions used to prepare accounting estimates were confirmed to be consistent with prior years. Page 36 of 268
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1. Audit of 2023/24 annual accounts | 13 Audit risk Assurance procedure Results and conclusions • Assess any changes to the methods and underlying assumptions used to prepare accounting estimates compared to the prior year. • Substantively test income and expenditure transactions around the year-end to confirm they are accounted for in the correct financial year. • Test accounting accruals and prepayments focusing on significant risk areas. As a result of the above work we are satisfied that there is no material misstatement arising from this risk. 2. Estimation in the valuation of land and buildings There is a significant degree of subjectivity in the valuation of land and buildings. Valuations are based on specialist and management assumptions, and changes in these can result in material changes to valuations. All non-current assets are revalued on a five-year rolling basis. Values may also change year on year, and it is important that the Midlothian Council ensures the financial statements accurately reflect the value of the land and buildings. Due to the inherent complexity and subjectivity risks regarding land, buildings and dwellings’ valuations, a significant risk of material misstatement in the 2023/24 valuations has been identified. • Review the information provided to the external valuer to assess for completeness. • Evaluate the competence, capabilities, and objectivity of the professional valuer. • Complete a walkthrough of the valuation process for Other Land and Buildings to obtain an understanding of the process, including the methodologies and assumptions applied. • Obtain an understanding of the management’s involvement in the valuation process to assess if appropriate oversight has occurred. • Test the asset register records against the annual valuation report to ensure asset valuations and useful lives are accurately reflected. • Sample testing of valuations and lives of individual assets revalued during 2023/24, and agreement of related accounting entries. We did not identify any issues with the information provided to the valuer and we found that management have an appropriate level of involvement and oversight of the valuation process. However, we found that the methodology used to value council dwellings did not fully comply with the principles of the Beacon principle. The Beacon principle requires a rent yield factor to be considered in the market value of housing and this had not been taken into account. We outlined our response to this in Exhibit 2. As outlined in Exhibit 2, we identified that further information on the condition of revalued assets was obtained post year end. As this had a material impact on the value of assets we requested that management adjust the accounts. We did not identify any non- compliance with RICS guidance. Page 37 of 268
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1. Audit of 2023/24 annual accounts | 14 Audit risk Assurance procedure Results and conclusions • Examine management’s assessment of fair value of assets not subject to full revaluation in 2023/24. We will critically assess if this is based on expert valuer’s opinion/ and assess the appropriateness of any assumptions. We concluded that management’s assessment of land and buildings not revalued in 2022/23 is not materially misstated but have identified areas for improvement in the methodology for valuing properties and in the assumptions used. Exhibit 2 We found that appropriate disclosures have been made regarding the assumptions in relation to the valuation of land and buildings. Source: 2023/24 Midlothian Council Annual Audit Plan 22. In addition, we identified “areas of audit focus” in our 2023/24 Annual Audit Plan where we considered there to be risks of material misstatement to the financial statements. The results of our audit procedures and conclusions are set out in Exhibit 4. Exhibit 4 Identified areas of audit focus Audit risk Results and conclusion 1.Valuation of pension liability The liability requires the use of an actuarial methodology based on a range of assumptions including financial and demographic assumptions. Small movements in these can result in material changes to valuations. We assessed the scope, independence and competence of the professionals engaged in providing estimates for pensions and reviewed appropriateness of actuarial assumptions and results including comparison with other councils. We established officer’s arrangements for ensuring the reasonableness of professional We are satisfied that the pension liability is correctly recognised on the balance sheet at 31 March 2024 and has been accounted for and disclosed correctly in line with International Accounting Standard (IAS) 19 Retirement benefits. We use an auditor’s expert to inform our review of the assumptions used in calculating this estimate and management’s judgements. We concluded the assumptions are appropriate and within a range which we consider to be acceptable. We are also satisfied the controls in place over the provision of information to the actuary are appropriate. Page 38 of 268
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1. Audit of 2023/24 annual accounts | 15 Audit risk Results and conclusion estimations and the accuracy of information provided to the actuary by Midlothian Council. Source: 2023/24 Midlothian Council Annual Audit Plan 23. As part of our risk assessment in our Annual Audit Plan, we also identified the following areas where further work would be performed. These were not audit risks but areas we kept under review: • Implementation of IFRS 16 (International Financial Reporting Standard 16, Leases) takes effect for local government bodies from 2024/25- This will change the way in which the Council accounts for operating leases, including recognising assets and liabilities for the rights and obligations arising from leases previously classified as operating leases. The council will implement IFRS 16 from 1 April 2024. The council has undertaken work to identify the changes required in relation to its relevant operating leases and has confirmed they will be fully compliant in 2024/25. • The statutory override relating to valuation of infrastructure assets- In 2021/22, across the UK, a technical accounting issue was identified covering infrastructure assets. Two temporary statutory overrides have been permitted since 2021/22 financial year but these were due to end at 31 March 2024. Infrastructure assets are inalienable assets, expenditure on which is only recoverable by continued use of the asset created. They include carriageways, structures, street lighting, street furniture and traffic management systems, and are measured in the accounting code at historical cost. A replaced component of an asset has to be derecognised and council records of additions do not permit compliance with the accounting code. A failure to derecognise assets correctly results in potential double-counting and an overstatement of the gross book value, accumulated depreciation and net book value of the assets. The Scottish Government originally issued a temporary statutory override in Finance Circular 9/2022 which applied to the 2022/23 and 2023/24 financial years. However, as a permanent solution has not yet been agreed, Finance Circular 8/2024 extends the applicable period to include 2024/25. The council continued to apply both statutory overrides in its 2023/24 annual accounts. We will continue to monitor and consider any actions required by the council once a resolution has been agreed and implemented. 24. We kept these areas under review throughout our audit. Based on the findings of the audit procedures performed, there are no matters which we need to bring to your attention. Page 39 of 268
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1. Audit of 2023/24 annual accounts | 16 Identified misstatements of £33 million were adjusted in the annual audited accounts 25. Total monetary errors of £33 million were identified in the annual audited accounts. The most significant errors related to the use of out of date condition reports in the council’s buildings’ valuations (£22 million) and the double counting of the Midlothian Energy Limited Shareholding in Group Share of net assets (£6 million). The inspection notice was placed in accordance with the required regulations and no objections were raised to the 2023/24 annual accounts 26. Regulation 9 of the Local Authority Accounts (Scotland) Regulations 2014 requires a local authority to give public notice on its website of the right to inspect its annual accounts. This must remain on the website throughout the inspection period. As part of our audit we confirmed that the 2023/24 annual accounts inspection notice published on the council’s website in accordance with the regulations. 27. The regulations also require a local authority to give the right of interested persons to inspect and object to its accounts, as provided for by section 101(a) (rights of interested persons to inspect and copy documents and to object to accounts) of the 1973 Act. 28. No objections were raised to the 2023/24 annual accounts. Good progress was made on prior year recommendations 29. Midlothian Council has made good progress in implementing the agreed prior year audit recommendations with one action outstanding. For the action not yet implemented, revised responses and timescales have been agreed with management and are set out in Appendix 1. Page 40 of 268
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2. Financial management | 17 2. Financial management Financial management means having sound budgetary processes, and the ability to understand the financial environment and whether internal controls are operating effectively. Conclusion Midlothian Council has effective and appropriate arrangements to secure sound financial management. During 2023/24 the Council managed its revenue budget and ended the year with a net underspend of £0.1 million. The level of usable reserves held by Midlothian Council decreased from £112 million in 2022/23 (including the service concessions opening balance adjustment of £20 million) to £101 million in 2023/24. The usable reserves balance of £101 million includes General Fund earmarked reserves of £37 million and ring fenced HRA, Capital Fund and Repairs and Renewals Fund reserves of £55 million, leaving only £9 million of General Fund non-earmarked reserves. Total General Services capital expenditure in 2023/24 was £47 million representing an increase of £24 million on 2022/23 capital spend. The council operated within budget in 2023/24 30. The council approved its 2023/24 revenue budget in February 2023. The revenue budget was set at £264 million and revised during the year to £276 million mainly due to cross-year flexibility. 31. During 2023/24 the Council managed its revenue budget and ended the year with a net underspend of £0.1 million. The General Fund Balance increased from £32 million at 31 March 2023 to £46 million at 31 March 2024, only £9 million of which was not earmarked for specific use. £16 million of the increase related to the retrospective application of service concessions. 32. Overall, the Council reported an underspend against the revenue budget of £0.1 million for the year, however there are significant variations in how different services have performed. The more significant under and overspends are summarised in Exhibit 5. Page 41 of 268
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2. Financial management | 18 Exhibit 5 Summary of significant under/overspends against revenue budget Area £m Reason for variance Underspends Loan Charges £2.8 million Primarily related to the timing of capital expenditure and higher interest rates Children & Young People £0.9 million Savings were reported across the range of learning settings for children and young people, except for additional support needs, mainly due to lower pupil numbers because of primary 1 deferrals and a lower than estimated number of children in council run Early Years settings. Non-critical vacant posts £0.8 million Management are continuing to review each vacancy before approval of recruitment, a policy put in place partly to mitigate delivery of planned saving and partly as a financial discipline measure. Overspends Pupil Transport Costs £1.2 million The volume and value of school transport invoices were higher than budgeted. A review of Council Transport is underway as part of the Transformation Blueprint and actions to start work to address findings in the Pupil Transport Update have been approved by the Business Transformation Steering Group. Fleet £0.9 million Due to ageing vehicles, higher than planned use of external contracting as well as external vehicle hire to support service continuity. Source: Midlothian Council 2023/24 Annual Accounts Page 42 of 268
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2. Financial management | 19 Housing revenue account reported an overspend of £1.5 million in 2023/24 33. The council is required by legislation to maintain a separate housing revenue account and to ensure that rents are set a level which will at least cover the costs of its social housing provision. 34. Overall, the HRA is showing an overspend of £1.5 million for 2023/24 against budget (2022/23: underspend £0.2 million) due to additional spend on repairs and maintenance, increased administration and management costs, and increased insurance liabilities resulting from the volume of claims for winter and fire damage. There have also been lower than budgeted rental income of £0.5 million in the year due to the social housing delivery programme and increased levels of outstanding rent debt. This has been offset by savings of £1.1 million from lower overall borrowing requirements and reduced debt costs. Reserves increased by £1 million, which was £1.5 million lower than when the budget was set as a consequence of overspends. The Council has appropriate budget setting and monitoring arrangements 35. We performed a review of the Council’s annual budget setting arrangements. The budget process implemented by the Council is well established and officers and Finance Business Partners are very clear about their responsibilities and time frames. The process involves appropriate scrutiny arrangements, with the Business Transformation Steering Group and Council both having opportunities to scrutinise the budget and consider opportunities to reduce any emerging budget gap. 36. The budget setting document includes an overview of financial assumptions and it offers good information regarding where there are projected over and underspends. It also gives brief explanations and context setting as appropriate. 37. We observed that senior management and members receive regular and accurate financial information on the Council’s performance against budgets. The level of usable reserves held by Midlothian Council decreased from £112 million in 2022/23 (including the service concessions opening balance adjustment of £20 million) to £101 million in 2023/24. 38. One of the key measures of the financial health of a body is the level of reserves held. The level of usable reserves held by Midlothian Council decreased from £112 million in 2022/23 (including the service concessions opening balance adjustment of £20 million) to £101 million in 2023/24. The usable reserves balance of £101 million includes General Fund earmarked reserves of £37 million and ring fenced HRA, Capital Fund and Repairs and Renewals Fund reserves of £55 million, leaving only £9 million of General Fund non-earmarked reserves. Page 43 of 268
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2. Financial management | 20 39. The Scottish Government introduced a series of enhanced financial flexibility arrangements to enable local authorities to vary proper accounting practice and help mitigate the financial impact of Covid-19. Finance Circular 10/2022 included a temporary flexibility which permitted a local authority to recognise the principal repayments for a service concession arrangement over the asset life rather than contractual term. 40. Midlothian Council approved the use of this financial flexibility in February 2023. 2023/24 was the first year of accounting for this financial flexibility with the full value of retrospection of £20 million added to the opening General Fund Balance. 41. Exhibit 6 provides an analysis of the general fund over the last five years split between earmarked and non-earmarked reserves. 42. The balance of earmarked reserves in 2023/24 includes £16 million service concessions flexibility, £15 million of devolved revenue budget management carry forwards, £3m set aside to balance the 2024/25 revenue budget and £2m committed to support transformation work. As mentioned in paragraph 39. above, the Council has only £9 million of non -earmarked reserves in the General Fund in 2023/24. Exhibit 6 Analysis of General Fund balance Source: Midlothian Council audited accounts 43. In recent years the Council has been able to use reserves and other one - off measures such as service concession flexibilities to focus on immediate budget pressures. However, looking forward if recurring savings cannot be identified and achieved to balance the annual revenue budget over the medium- 0 10 20 30 40 50 60 2019/20 2020/21 2021/22 2022/23 2023/24 Million Earmarked Reserves Non-Earmarked Reserves Page 44 of 268
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2. Financial management | 21 term, and the Council continues to use general fund reserves to bridge identified funding gaps, the non-earmarked reserves balance will be depleted fairly quickly. 44. The purpose of the earmarked reserves could be re-examined by elected Members should there be a need to release some of these balances to support financial pressures. 45. From 2025/26 onwards the Council will need to make increasingly difficult choices about spending priorities and levels of service provided. We have explored the challenges regarding creating a balanced revenue budget in section 3 of this report. General Services capital expenditure increased in 2023/24 46. Total General Services capital expenditure in 2023/24 was £47 million (2022/23: £23 million), £26 million of which was spent on the council’s children, young people and estates programme, £13 million was spent on digital expenditure; roads and street lighting; replacement of council fleet vehicles and transport and £6 million was spent on the destination Hillend programme. 47. The Council has initiated a capital plan prioritisation exercise which is reviewing all areas of uncommitted spend in the context of the Medium -Term Financial Strategy. During 2023/24 the Council rephased £53 million of planned capital expenditure to 2024/25, however, the Council has reported that there is a risk that the rephased projects will now cost more than originally planned which could result in higher borrowing costs. The Council has also reported that monitoring procedures are in place to ensure that any additional costs will be reported as early as possible to enable remedial action to be taken. 48. During 2023/24 the Council completed the first phase of destination Hillend project and the Alpine Coaster opened in September 2024. The project experienced delays outwith the Council’s control and the Alpine Coaster opened a few months later than planned. Destination Hillend project, on completion, will provide a year round family oriented multi activity leisure attraction to improve and safeguard the future of Midlothian Snowsports centre. The Council makes use of financial indicators to demonstrate that its capital plans are affordable, prudent and sustainable 49. The Council can regulate its own capital spending limits within a prudential framework recommended by the Chartered Institute of Public Finance and Accountancy (CIPFA) and endorsed by Scottish Government, provided it operates within a series of indicators. 50. The Council’s capital expenditure is a key driver of treasury management activity, and the following indicators included in the audited accounts demonstrate that the Council’s capital investment plans are affordable, prudent and sustainable. Page 45 of 268
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2. Financial management | 22 Exhibit 7 Financial Indicators Financial Indicator 2022/23 2023/24 Commentary Capital financing requirement – underlying need to borrow (excl. PFI/PPP/DBFM) £339 million £402 million Reflects the Council’s underlying need to borrow to finance capital expenditure incurred historically by the Council that has yet to be financed. Authorised Debt Limit £473 million £534 million This represents the maximum amount that the authority may borrow and is set at a level that reflects capital expenditure plans but includes headroom to allow for unusual cash movements. Actual external borrowing £322 million £341 million The actual external debt and long-term liabilities position of the Council. The actual figures should never exceed the Council’s Authorised Debt Limits, which are calculated in line with the requirements of the Prudential Code for Capital Finance in local authorities. Under / (Over) Borrowed £17 million £61 million This demonstrates that the Council’s capital borrowing requirement has not been fully funded by loan debt and is using cash from working capital to support capital programmes whilst interest rates on long-term fixed rate borrowing are high. Ratio of finance costs to net revenue stream – General Fund 0.4% 0.6% This is a measure of how affordable the Council’s capital plans are. It takes actual finance costs as a % of net revenue spend. External Loans Fund Interest Rate 3% 3% Average rate of interest paid on external debt. Internal Loans Fund Interest Rate 2% 2% This combines the interest paid by the Council on money borrowed, with the interest earned by the Council on money invested, along with other charges to arrive at a weighted average ‘loans fund rate’ figure for the council. Source: Midlothian Council Annual Accounts 2023/24 51. The Council makes good use of prudential indicators. There is scope to extend the use of indicators to incorporate budgeting indicators included in the Page 46 of 268
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2. Financial management | 23 Local Government Benchmark Framework published by the Improvement Service and additional indicators included in the Prudential Code by CIPFA. Financial systems of control 52. From our review of the design and implementation of systems of internal control (including those relating to IT) relevant to our audit approach, we did not identify any issues with the design of the controls which would increase the risk of a material misstatement in the financial statements. However, we identified two areas where controls could be improved as set out in Exhibit 8. Exhibit 8 Key findings from review of key controls Audit findings Additional audit procedures 1. Journals The Council’s financial ledger is the system for recording all transactions and preparing the financial statements. Journal entries are how the Council’s financial ledger is manually updated. To minimise the risk of error and fraud we would expect each journal entry to be prepared and authorised by different members of staff. This control is not in operation for a small number of staff within the finance team. The ability of officers to approve their own journals increases the risk that invalid, erroneous or fraudulent journals could be posted to the financial ledger. We reported this control weakness in our 2022/23 Annual Audit Report and the Council has confirmed they are accepting of the associated risks. Our journals testing across the year reflected the increased risk arising from self-approval of journals and we did not identify any issues. 2. Ledger access Access to the ledger requires to be tightly controlled to mitigate the risk of fraudulent mis-postings. Midlothian Council has provided a number of officers with superuser access which permits enhanced access to the ledger for IT support requirements. A list of superusers is held but it is not currently monitored on a regular or formal basis. We performed a focussed review and testing of journals posted by Superusers. We did not identify any errors from this review and testing. Recommendation 3 (refer Appendix 1) We recommend that the Superuser list is subject to a formal and regular review process. Page 47 of 268
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2. Financial management | 24 Audit findings Additional audit procedures 53. The control deficiencies reported here are limited to those identified while completing audit work for these purposes. Standards of conduct and arrangements for the prevention and detection of fraud and error were appropriate 54. In the public sector there are specific fraud risks, including those relating to tax receipts, welfare benefits, grants, and other claims made by individuals and organisations. Public sector bodies are responsible for implementing effective systems of internal control, including internal audit, which safeguard public assets and prevent and detect fraud, error and irregularities, bribery, and corruption. 55. The Council’s counter fraud activity during 2023/24 included completion of all planned Counter Fraud work as set out in the Counter Fraud Annual Plan 2023/24, relating to activities such as contract management, corporate fraud enquiries, social housing and council tax. On top of the savings noted below under NFI, the Council calculates that a further saving value of £393k has been identified during 2023/24 as a result of this counter fraud activity. National Fraud Initiative 56. Midlothian Council continues to participate in the National Fraud Initiative (NFI) 2022/2023 which is a UK wide counter-fraud exercise led by the Cabinet Office and Audit Scotland. It uses data analytic techniques to compare information about individuals held by different public bodies, and on different systems, to identify circumstances (data matches) that might suggest the existence of fraud or error. 57. The Principal Internal Auditor of the Council acts as the Key Contact for NFI and the Corporate Fraud Team has coordinated the submission of the required data sets from various Council systems and responded to the data matches received with input from relevant Services across the Council. 58. We consider that the Council has adequate arrangements in place to prevent and detect fraud or other irregularities. Page 48 of 268
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3. Financial sustainability | 25 3. Financial sustainability Financial Sustainability means being able to meet the needs of the present without compromising the ability of future generations to meet their own needs. Conclusion The latest 2024/25 budget monitoring report reported to the Council in October 2024 is projecting an overspend of £2.2 million against a revised budget of £316 million, and a General Fund reserve balance of £21.5 million of which £6.8 million is non-ear marked. The Council recently considered the five-year Medium Term Financial Strategy which is showing a budget gap of £21 million to 2028/29. The Council is aware that it faces heightened financial challenges, and transformation is essential in delivering balanced budgets and financially sustainable services. Audit work has addressed the wider scope risks identified in the Annual Audit Plan 59. As part of our planning work we identified a risk around financial sustainability and the ongoing need to balance the short term budgetary pressures with long term priorities. Our work in this section provides an overview of our work and the Council’s position. The latest 2024/25 budget monitoring report reported to the Council in October 2024 is projecting an overspend of £2.2 million against a revised budget of £316 million, and a General Fund reserve balance of £21.5 million of which £6.8 million is non-ear marked. 60. In February 2024 the Council approved a revenue budget for 2024/25 with total planned expenditure of £301 million. 61. The latest 2024/25 budget monitoring report reported to the Council in October 2024 is projecting an overspend of £2.2 million against a revised budget of £316 million, and a General Fund reserve balance of £21.5 million of which £6.8 million is non-ear marked. 62. While the projected general fund reserve balance is above the approved minimum level of reserve balance of £4.7 million, at quarter two, the planned Page 49 of 268
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3. Financial sustainability | 26 use of reserves over the medium term will significantly reduce scope for reserves to be used to balance the longer- term budget gaps. We have highlighted in our briefing on Local Government Budgets 2024/25 that the financial challenges are sector wide and that councils will be required to make tough choices regarding service cuts, increases to charges and prioritising the needs of vulnerable groups. The five-year revenue budget strategy agreed in October 2024 is projecting a budget gap of £21 million to 2028/29 63. The Council updated the five-year revenue budget strategy in October 2024 and is projecting a cumulative budget gap of £21 million to 2028/29. The medium -term financial plan includes a number of assumptions which are reviewed on a frequent basis and sensitivity projections have been forecast across several budget areas. 64. As illustrated in recently published Census results and also in National Records of Scotland population projections, Midlothian has been and is expected to remain, the fastest growing council area in Scotland and by some margin. This provides real and ongoing challenge to the council in terms of fast- increasing service demand with associated costs significantly outstripping changes in funding provided on an annual basis through the Local Government Finance Settlement. The Council have raised detailed concerns with government at meetings and also through formal letters exploring options like a Growth Fund discussing the impact of the funding floor on a fast-growing council. The Council is aware that it faces heightened financial challenges, and transformation is essential in delivering balanced budgets and financially sustainable services 65. Transformation is essential to protect the delivery of vital public services. Audit Scotland recently published the national report Transformation in Councils in October 2024. The overarching key message is that “faster reform is needed to protect key services.” The report notes that councils have been transforming how they operate and deliver services for many years and now reform is increasingly urgent. Councils and key partners must significantly increase the pace and scale of major changes if they are to protect vital public services. 66. The Council recognises that transformation is essential to ensure service delivery remains financially sustainable and has published a Transformation Blueprint for Midlothian which aligns with the five-year revenue budget strategy to 2028/29. Transformation will be reviewed in 2024/25 as part of our best value work. The pensions’ triennial funding valuation as at 31 March 2023 has provided a potential positive impact on finances 67. The most recent triennial funding valuation took place across Local Government Pension Scheme pension funds at 31 March 2023. The main purpose of the valuation is to review the financial position of each fund and to Page 50 of 268
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3. Financial sustainability | 27 set appropriate contribution rates for each employer for the upcoming three- year period as part of the fund’s overall funding strategy. 68. The Council is a scheduled member of Lothian Pension Fund (LPF), the second largest local Government Pension Scheme in Scotland. The LPF has communicated that its March 2023 Valuation has been finalised by and employer contribution rates from 1 April 2024 are now confirmed. The valuation dated 31 March 2023 for LPF showed a funding level of 157%, a significant increase from 106% in 2020. 69. Reducing employer contributions will reduce the costs associated with pensions, thereby reducing some of the cost pressures faced by the council in 2024/25. From April 2024, the employer rate has been reduced from 22.2% to 17.6%. This change to employer contributions has been built into the council’s financial budget plans for 2024/25 and overall budget gap identified for that year, and budget projections for future years. Page 51 of 268
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4. Vision, leadership and governance | 28 4. Vision, leadership and governance Public sector bodies must have a clear vision and strategy and set priorities for improvement within this vision and strategy. They work together with partners and communities to improve outcomes and foster a culture of innovation. Conclusion Midlothian Council has appropriate governance arrangements in place to support effective scrutiny, challenge and informed decision making. Midlothian Council has appropriate governance arrangements in place to support effective scrutiny, challenge and informed decision making 70. The governance and transparency arrangements we consider in reaching our conclusions include: • Council and committee structure and conduct • overall arrangements and standards of conduct including those for the prevention and detection of fraud, error, bribery and corruption. This includes action in response to the National Fraud Initiative • openness of Council and committees • reporting of performance and whether this is fair, balanced and understandable. 71. The Council’s governance arrangements have been set out in the annual governance statement in the annual accounts. We have reviewed these arrangements and concluded that they are appropriate and effective. Our observations at committee meetings have found that these are conducted in a professional manner and there is a reasonable level of scrutiny and challenge by members. 72. We consider that governance arrangements remain appropriate and support effective scrutiny, challenge and decision making. Page 52 of 268
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4. Vision, leadership and governance | 29 Climate change arrangements 73. The Scottish Parliament has set a legally binding target of becoming net zero by 2045. The public sector in Scotland has a key role to play in ensuring these targets are met and in adapting to the impacts of climate change. 74. Midlothian Council has reported its commitment to achieving net zero by 2030. 75. The Council recognises the strategic risks of fulfilling the requirements of the Climate Change Act including staffing and significant financial investment and began actively managing the risks in 2019. We reported in our 2022/23 Annual Audit Report that the Council declared a climate emergency in December 2019 and published its Climate Change Strategy and action plan in August 2020. In November 2024 the Council approved an updated Climate Strategy and agreed to move the target date for achieving net zero to 2045. 76. A Carbon Charter and action plan for Midlothian Businesses has been created and includes local, national and international resources to support businesses to become more energy and carbon efficient. 77. A Climate Emergency Group has been established to monitor progress of the Council’s ambitious targets. The group consists of elected members, individuals and representatives of the community councils and community groups, national government agencies, third sector organisations, the local chamber of commerce, landowners and Midlothian Energy Ltd. 78. Failure to adapt to climate change is included in the Council's corporate risk register and is actively monitored through the corporate risk management process. We will continue to review progress against actions identified to mitigate the risks. 79. The Auditor General for Scotland and Accounts Commission are developing a programme of work on climate change. This involves a blend of climate change-specific outputs that focus on key issues and challenges as well as moving towards integrating climate change considerations into all aspects of audit work. IT control environment 80. As part of our planning, we recognised the ongoing risks across the public sector around the use of digital technology. 81. The use of digital technology and its links to workforce planning was considered as part of our Best Value work outlined in section 5. The Council published an updated Digital Strategy in October 2024 and we will monitor implementation of the digital strategy and the IT control environment as part of our work in 2024/25. Page 53 of 268
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5. Best Value | 30 5. Best Value Councils have a statutory duty to make arrangements to secure continuous improvement in the performance of their functions. Conclusions Midlothian Council has an appropriate and effective best value framework in place. Our thematic review of Workforce Innovation found the development of an organisational workforce strategy is ongoing and this will align with the council’s priorities as set out in the Transformation Blueprint. Our full Best Value thematic report was presented to the Council in September 2024 and identified examples of good practice and areas for improvement. The Council has made good progress against Best Value improvement actions reported in our Best Value Assurance Report 2019 with only one action remaining outstanding and both of these actions are progressing. Best Value work in 2023/24 82. As set out in the Code of Audit Practice 2021, the audit of Best Value in councils is fully integrated within the annual audit work performed by appointed auditors and their teams. Auditors are required to evaluate and report on the performance of councils in meeting their Best Value duties. 83. For 2023/24, the scope of Best Value work included conclusions on: • Effectiveness of council performance reporting • Best value thematic work covering Workforce Innovation • Progress made against Best Value improvement actions made in previous years. Midlothian Council has a framework in place to measure and monitor service performance and progress against the Council’s priorities 84. The Best Value: Revised Statutory Guidance 2020 sets out that: Page 54 of 268
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5. Best Value | 31 • performance management arrangements should be in place to promote the effective use of the local authority’s resource, which includes effective performance reporting. • councils should be able to demonstrate a trend of improvement over time in delivering its strategic priorities. 85. The Best Value Assurance Report (BVAR, published in 2019) highlighted that the Council is committed to using evidence and provides comprehensive performance information to elected members and the public. In response to the BVAR, the Council implemented a digital dashboard performance management system, Pentana Browser, where elected members can access up-to-date performance data. 86. Further information on performance is included in section 6 of this report Workforce Innovation: how councils are responding to workforce challenges 87. Annual thematic Best Value work is set by the Accounts Commission. For the 2023/24 financial year, auditors were asked to focus on workforce innovation within the council. The results of this work were reported to elected members at the September 2024 Audit Committee. The key findings from this work are noted in Exhibit 9 and the action plan is included in Appendix 1. The full report will be published on Audit Scotland’s website in due course. Exhibit 9 Workforce innovation: key findings Workforce innovation topic Key messages Workforce strategy and priorities In 2022, the Council approved a new Transformation Blueprint which defines what services the Council will provide in the future, where these services will be delivered and by whom. The Blueprint is divided into five main themes of which theme 2 focuses on the creation of a 21st Century workforce. The Council is currently developing an organisational workforce strategy and plan for a ten- year period from 2024 to 3034 and is expecting to have this approved by committee in December 2024. Work is ongoing to ensure the strategy and plan support delivery of the council’s priorities which are set out in the Transformation Blueprint. Digital technology and the workforce The new digital strategy was presented to Council in November 2024. The Council has already realised workforce benefits through its successful implementation of Microsoft 365 and the use of digital technology in education services. The council is continuing to explore how the use of digital initiatives can further improve processes. The council has launched a new customer services platform to promote channel shift. Key benefits of this include an improved Page 55 of 268
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5. Best Value | 32 Workforce innovation topic Key messages customer journey, faster response times for service requests, helping to reduce complaints and duplication of work. The Customer Service Platform project is a 4-year programme which commenced in 2022. Nine modules were live by June 2024, with a number of modules in planning and test phase (over 40) to go live in the remainder of 2024/25. Update – the new Digital Strategy was presented to the Council in November 2024. Flexible working and other innovative staff deployment The council’s Hybrid Working Policy was approved in 2023. Hybrid working provides flexibility for staff and is promoted by the council as a non-financial benefit for employees. It is worth noting that most of the Council’s workforce are front facing but for those who have a role that can be delivered in a hybrid way, the Council recommends and supports this way of working. As the policy is embedded and hybrid working practices are fully adopted, supported by the rollout of digital tools such as M365, then the council will be able to assess the overall impact of hybrid working at an organisational level. Developing future skills and capacity Capacity and recruitment issues are significant challenges for the council with shortages being experienced in several key services including education, digital, procurement and social care and social work. The council and the Health and Social Care Partnership have introduced a number of initiatives to improve capacity and skills for their existing and future workforce. Careful consideration has been given to providing opportunities for young people and the unemployed and Employment/Job Fairs are delivered by the People and Partnerships Directorate to promote work opportunities available at the Council and with local partners. Joint workforce arrangements The Council shares services with and roles with other councils. The workforce benefits of these arrangements have still to be captured or quantified. Measuring the impact of workforce planning The council monitors a range of workforce data as part of performance reporting. As part of the development of a workforce strategy the council should consider how performance information can support the achievement of objectives. Source: Workforce Innovation: how councils are responding to workforce challenges 2023/24 Page 56 of 268
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5. Best Value | 33 The audit recommendations made in this report, with the management responses, are included in Appendix 1 of this report. The Council has made good progress against Best Value improvement actions reported in our Best Value Assurance Report 2019 88. We reported in our 2022/23 Annual Audit Report that Midlothian Council has demonstrated ongoing commitment to best value since our Best Value Annual Report 2019. We have noted improvements in performance reporting and medium-term financial planning as well as the strengthening of officer member relationships. 89. The Council has made good progress against Best Value improvement actions from 2019 with only one action remaining outstanding and this action is in progress. Exhibit 10 Outstanding Best Value improvement action from 2019 Action Status The council needs to ensure that workforce planning reflects the medium-term financial strategy. Outstanding – refer to Exhibit 9 above Source: Midlothian Council Best Value Assurance Report 2019 Page 57 of 268
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6. Use of resources to improve outcomes | 34 6. Use of resources to improve outcomes Public sector bodies need to make best use of their resources to meet stated outcomes and improvement objectives, through effective planning and working with strategic partners and communities. Conclusions The Best Value framework supports the delivery of continuous improvements in priority services. Midlothian Council has a Performance Management Framework in place and reports on performance utilising balanced scorecard, quarterly and annual reporting, progress reports and local government benchmarks. There is scope for improvement to ensure key messages are clear and performance is mapped to outcomes. Midlothian Council has satisfactory arrangements for the preparation and publication of Statutory Performance Information (SPIs). Midlothian Council has a Planning and Performance Management Framework in place which provides a good base for supporting delivery of outcomes and improving performance 90. The Council published a revised Planning and Performance Management Framework (PPMF) in 2023. The framework sets out arrangements to ensure the Council can demonstrate a focus on outcomes while continuing to reflect statutory performance reporting requirements set out in the Statutory Performance Information Direction 2021. 91. The Community Planning Partnership Board monitors performance of the Single Midlothian Plan every six months with the annual report highlighting success stories arising from the achievement of outcomes. The Council use a separate balanced scorecard to track the performance indicators for the services it is directly responsible for. 92. The PPMF delivers a range of performance reports including the Single Midlothian Plan Performance Reports, quarterly and annual performance reports, benchmarking reviews and balanced scorecard reports. Page 58 of 268
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6. Use of resources to improve outcomes | 35 93. Officers and members should continue to review these revised arrangements to assess their effectiveness and should be able to demonstrate that they have been used to drive improvement. It is important that performance reporting is timely, fair and balanced, and should clearly and easily highlight where underperformance or weaknesses exist so that timely, targeted action can be taken. Midlothian Council has reported that they made significant improvements across a range of service areas 94. The Council reported in June 2024 that they made significant improvements across a range of service areas despite facing pressures caused by budget constraints, the impacts of a global pandemic, growing demographic pressures and cost of living crisis which places increased demand for its services. 95. As detailed in para 98 above, one tool the Council uses to monitor and report performance is the Balanced Scorecard. The Balanced Scorecard is a tool intended to capture the outcome indicators from the SMP as well as providing Council specific targets on financial health, internal processes and learning and growth. These performance indicators for 2023/24 are published on the Council’s website and the 2023/24 Scorecard was considered by the June 2024 PRS Committee. Balanced Scorecard results show stable performance 96. Our review of the Balanced Scorecard results found the number of objectives which are on-target are at a similar level to the previous year. We also noted that there was no significant decline in performance of services. 97. We identified areas from the balanced scorecard, where performance has been off- target for a number of years and it was not always evident what actions had been put in place to address these areas. However, there were some good examples of measures to improve performance in or education services. One example, was actions put in place to address poor school attendance with the launch of attendance procedures in January 2024, establishing a research team of children and young people to research the factors influencing attendance and the establishment of The Attendance Partnership Network (APN). 98. The PPMF provides a range of performance reports including the Single Midlothian Plan Performance Reports, quarterly performance reports, annual performance reports, benchmarking review and balanced scorecard. Scrutiny is conducted by the Performance Review and Scrutiny (PRS) Committee and the Audit Committee. Service reports provide a good mix of narrative, visual and target information and there is a lot of detail outlining details of achievements in 2023/24, but key messages are not explicit and Page 59 of 268
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6. Use of resources to improve outcomes | 36 it is unclear how the achievements translate to improvement in outcomes. 99. We reviewed a sample of performance reports and concluded that the service reports provide a good mix of narrative, visual and target information and there is a lot of detail outlining details of achievements in 2023/24, but key messages are not explicit and it is unclear how the achievements translate to improvement in outcomes. Recommendation 4 The Council should review and streamline service performance reports. Key messages should be clear, and performance should be mapped to outcomes. 100. The Council moved to a four-year Single Midlothian Plan from 2023-27. The top priorities and stated outcomes for this period are summarised as Individuals and Communities have Improved Health and Learning Outcomes; No Child or Household Living in Poverty; and Progress is made towards Net Zero Carbon Emissions. 101. The Community Planning Partnership (CPP) Board, made up of a number of organisations, monitors performance of the SMP every six months with the annual report highlighting examples of success stories. 2023/24 was a transition period for the SMP and the report for this period was for the 6 months to 31 March 2024. This was reported to the CPP Board in May 2024. The report publishes headline achievements in 2023/24 with progress on outcomes in each thematic area detailed. 102. The 7 thematic areas of the 2023-27 Plan are: • Midlothian will be healthier • Midlothian will be safer • Midlothian will get it right for every child • Midlothian will support residents to improve employability and outcomes for our communities • Midlothian will be greener • Midlothian will have a wellbeing economy and be better connected • Midlothian will work towards reducing poverty. Page 60 of 268
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6. Use of resources to improve outcomes | 37 The Single Midlothian Plan Report 2023/24 demonstrates progress across the thematic areas is broadly on plan. 103. The Single Midlothian Plan Report 2023/24 provides an update on progress towards the actions in the plan and reports on a Red/Amber/Green status for each action. The report demonstrates progress across the thematic areas is broadly on plan. There are areas where progress is shown as off target within the themes of “Midlothian will Supporting Residents to Improve Employability and Outcomes in our Communities” and key challenges in this area include cuts to Foundation Apprenticeship funding and delayed notification of employability funding awards, issues which are being raised at a national level. In addition, the Wellbeing Economy theme also shows some targets missed as time is taken for developments to materialise in this area, which are being progressed in 2024/25. Benchmarking against other councils in Scotland shows some improvement but shows challenges at Midlothian for financial sustainability and children’s services. 104. Midlothian Council participates in the Local Government Benchmarking Framework (LGBF). The framework brings together a wide range of information about how all Scottish councils perform in delivery services, including the cost of services and how satisfied citizens are with them. The tool is designed to support senior management teams and elected members to ask questions about key council services and focus on variations between similar Councils. Information is managed and monitored by the Corporate Solutions team and is available to citizens on the Midlothian Council website. 105. The most recent National Benchmarking Overview Report 2022/23 was published in June 2024. This shows overall that 56 of 104 available performance indicators had improved or stayed the same nationally since the prior year. 48 of 104 available performance indicators had deteriorated when assessed against the previous year. This is an overall position, and certain indicators, such as financial sustainability and children’s services have shown deterioration of 60% or more at Midlothian Council in this time period. 106. The 2022/23 report notes that the data reflects a period when communities and council services were managing unprecedented financial challenges due to high inflationary pressures and the cost-of-living crisis against a backdrop of deepening fiscal, demand and workforce pressures, including those resulting from the ongoing effects of the Covid pandemic. 107. There is use of LGBF data within Council service area reporting and within the Transformation Blueprint. Community Planning Outcomes Profile benchmarking is used within Community planning and features in the SMP. 108. The Council has stated that there will be a significant focus on making shift happen by moving the number of LGBF Quartile 3 and 4 indicators of the Council into the top two measures to deliver better outcomes. Page 61 of 268
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6. Use of resources to improve outcomes | 38 Recommendation 5 The Council should prioritise the focus on those indicators which will link to the SMP or Transformation Blueprint priorities so that focus on indicators and targets is meaningful. Midlothian Council has satisfactory arrangements for the preparation and publication of Statutory performance information (SPIs) 109. The Accounts Commission’s 2021 Statutory Performance Direction defines the performance information that councils must publish. The commission does not prescribe how councils should report this information but expects them to provide the public with fair, balanced, and engaging performance information. 110. The Statutory Performance Direction (December 2021) details two indicators on which councils are required to publish information: Indicator 1: Improving local services and local outcomes • its performance in improving local public services, both provided by itself and in conjunction with its partners and communities and progress against these agreed desired outcomes. Indicator 2: Demonstrating Best Value • its assessment of performing against its duty of Best Value, including audit assessment and those from other scrutiny bodies and how it has responded to the assessments. 111. In addressing these two indicators, information provided has to be balanced and addressing areas of both good and poorer performance, present information in a timely manner and make it accessible for all the community. 112. We have evaluated Midlothian Council’s arrangements for fulfilling the above requirements in 2023/24 and concluded that the Council’s performance reporting arrangements were satisfactory. The Council covers the requirements set out in the SPI direction issued by the Accounts Commission. We consider appropriate arrangements are in place for improving services and monitoring desired outcomes through the Planning and Performance Management Framework suite of reporting with scope for improvement as noted in paragraph 105. Page 62 of 268
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Appendix 1. Action plan 2023/24 | 39 Appendix 1. Action plan 2023/24 2023/24 recommendations Issue/risk Recommendation Agreed management action/timing 1. Non- current assets condition surveys In 2023/24 the Council performed a full valuation of other buildings in line with its revaluation policy. The condition survey ratings held on the non- current asset register were considered in preparing the valuation estimates. We found that a number of condition surveys were updated during 2023/24 and were allocated reduced ratings. Although the surveys were not finalised until after the year end, the revised condition ratings applied to the relevant buildings at 31 March 20024 and should have been considered in calculating the valuation estimates. This resulted in an estimation error of £19 million in the unaudited accounts. Risk – There is a risk of error in the valuation of buildings. The most up to date condition ratings should be applied to all buildings at the date of valuation. Paragraph 20. Accepted Chief Officer Place 31 March 2025 Page 63 of 268
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Appendix 1. Action plan 2023/24 | 40 Issue/risk Recommendation Agreed management action/timing 2. Non-current assets council dwellings Determining the valuation of council dwellings involved applying discount factors to reflect the difference between social and market rents. In 2023/24 the discount factor applied was 33% which we found to be reasonable in comparison to a number of similar authorities. However, guidance for valuers – ‘stock valuation for resource accounting’ published in 2016 by department for communities and local government highlights that the discount factor for social housing should be determined with reference to the relationship between rents and yield in the private residential sector and the public / socially rented sector. We found that the rent yield factor had not been considered when valuing council dwellings in Midlothian. Risk – there is a risk that the valuation of council dwellings does not fully comply with guidance. To fully comply with Guidance for valuers – ‘stock valuation for resource accounting’ published in 2016 by department for communities and local government, Management should consider the rent yield adjustment in valuations of council dwellings. Paragraph 20 Accepted The Council’s valuation basis in this area will be reviewed with reference to guidance for Valuers and updated if deemed appropriate. Chief Officer Place, Chief Financial Officer 31 March 2025 3. Ledger access Access to the ledger requires to be tightly controlled to mitigate the risk of fraudulent mis-postings. The Superuser list, which is small group of users with enhanced access to ledger for IT support requirements, We recommend that the Superuser list is subject to a formal and regular review process. Paragraph 52. Accepted Chief Officer Corporate Solutions, Chief Financial Officer. 31 December 2024 Page 64 of 268
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Appendix 1. Action plan 2023/24 | 41 Issue/risk Recommendation Agreed management action/timing is not currently monitored on a regular or formal basis. Risk – there is an increased risk of fraud or error. 4. Performance reporting We reviewed a sample of service performance reports and concluded that the reports provide a good mix of narrative, visual and target information and there is a lot of detail outlining details of achievements in 2023/24, but key messages are not explicit, and it is unclear how the achievements translate to improvement in outcomes. Where areas of underperformance are reported it is not always clear how the Council is addressing these areas. Risk: Performance reports are not providing clear information to enable monitoring of performance against key Council objectives. The Council should review and streamline service performance reports. Key messages should be clear, and performance should be mapped to outcomes. Paragraph 99. Accepted 5. Local Government Benchmark Framework There is use of LGBF data within Council service area reporting and within the Transformation Blueprint. Community Planning Outcomes Profile benchmarking is used within Community planning and features in the SMP. The Council has stated that there will be a significant focus on making shift happen by moving the number of LGBF Quartile 3 and 4 The Council should prioritise the focus on those indicators which will link to the SMP or Transformation Blueprint priorities so that focus on indicators and targets is meaningful. Paragraph 108. Accepted Page 65 of 268
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Appendix 1. Action plan 2023/24 | 42 Issue/risk Recommendation Agreed management action/timing indicators of the Council into the top two measures to deliver better outcomes. Risk: Resources are focussed on indicators which do not link to corporate priorities. b/f 1 Bank accounts At the year-end we identified over 20 bank accounts (mainly imprest accounts) with small balances which were not reconciled to the ledger on a regular basis. Risk – there is a risk that errors may not be picked up and corrected timeously. There is also a risk that the Council is operating a number of bank accounts which are no longer required The Council should consider the bank accounts held and if they are still required A full review of all bank accounts will be performed in 2024/25. Responsible officer: Chief Financial Officer Revised date: 31 March 2025 2023/24 recommendations from the BV thematic report Issue/risk Recommendation Agreed management action/timing 1. Capacity of human resources team The human resources team is small with four members of staff, each allocated to a directorate with an overall council workforce of around 4,000 full time equivalent. Discussion with officers highlighted that finding capacity for strategic workforce planning alongside business as usual is challenging and could affect the delivery of objectives within timescales. It is critical that the Council ensures it has sufficient capacity and to deliver its corporate workforce strategy and detailed plans within agreed timescales. Accepted The Council is currently developing its refreshed Workforce Strategy 2024- 2034 which will be presented to Council in December 2024. The strategy will be accompanied with an implementation plan for the first two years, and within this a resourcing plan to deliver the work programmes within. Chief Officer Corporate Solutions Page 66 of 268
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Appendix 1. Action plan 2023/24 | 43 Issue/risk Recommendation Agreed management action/timing Risk – Workforce planning is not being progressed in line with corporate objectives. 2. Organisational impact of hybrid and flexible working The Council has not assessed the overall impact of hybrid and flexible working at an organisational level for example on performance, budget savings and efficiencies. Discussions are ongoing about the impact of hybrid working on the estate; while the Council has data on the use of their offices there are no current proposals on changing the estate. Risk: Employees and the council may not be securing planned benefits and efficiencies from adopting hybrid and flexible working. The Council should assess the impact of hybrid working at an organisational level to ensure this way of working is generating organisational benefits as well as benefits for employees on an individual level. A follow up report on the impact of hybrid working will be developed in early 2025. 3. Staff survey The Council has not carried out a staff survey for a few years although it is something they are considering doing again. This makes it difficult to identify and monitor trends in how staff are feeling. Risk: The Council has no measure of how staff are feeling or the impact across the workforce of any new workforce policies or initiatives. The Council should carry out regular staff surveys to identify and monitor trends in how staff are feeling. This will enable the Council to measure the impact of any new workforce policies or initiatives. This work is ongoing to inform the workforce strategy development. A summary report of L&L sessions, actions and responses will be developed and presented to Corporate Management Team in early 2025. An all staff survey was issued in late August 2024, which is the first since 2019. This is to primarily inform the development of the workforce strategy but will also be the first of actions to adopt a staff engagement programme for the organisation – the staff engagement programme will be developed and presented Page 67 of 268
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Appendix 1. Action plan 2023/24 | 44 Issue/risk Recommendation Agreed management action/timing to Corporate Management Team in early 2025. 4. Developing future skills and capacity Capacity and recruitment issues are significant challenges for the council. Some good employment initiatives are in place and there are some examples of succession planning but this is not being done in a formalised or consistent way. Risk: Capacity and recruitment issues are not being addressed consistently or in line with corporate objectives. The Council needs to formalise its overall approach to recruitment and developing future skills and capacity. This work programme will be part of the ten-year Workforce Strategy to be presented to Council in December 2024. 5. Shared services Midlothian Council shares several services with other councils across the Lothian region. The Council has not captured the extent to which there have been workforce benefits resulting from these shared roles. These might include reduced workforce, costs, or service benefits Risk: The Council is unable to demonstrate workforce benefits resulting from shared roles. This information would help with workforce planning and budgeting. The Council should consider capturing the extent to which there have been workforce benefits resulting from shared services. Work is required to develop a benefits realisation approach to shared services. This will be looked at as part of the review of the existing shared services in Q3/4 2024/25. 6. Performance management framework To ensure the success of the workforce plan the Council needs to develop a high- quality performance The Council should ensure that organisational and service level workforce strategies are supported by appropriate performance management information including quantifiable metrics. KPIs will be developed for the delivery of the Workforce Strategy and integrated into the quarterly performance reporting which is presented to Cabinet and Performance, Review and Scrutiny Page 68 of 268
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Appendix 1. Action plan 2023/24 | 45 Issue/risk Recommendation Agreed management action/timing management framework linked to the strategy. Risk: Without the use of robust data the Council will not be able to make informed decisions about staffing levels, skills requirements and resource allocation which would help build a sustainable workforce. Committee. This will be implemented for Q3/Q4 2024/25 reporting. Follow-up of prior year recommendations Issue/risk Recommendation and Agreed Action Progress 1. Review of control accounts for classifications Our audit work identified some areas where the classification of transactions or balances was incorrectly disclosed within the notes to the accounts. Risk – the notes to the accounts do not reflect the underlying categories of the transactions. The Council should ensure going forward that control accounts such as trade debtors are reviewed to ensure balances with central government and other public sector bodies are classified appropriately at the year-end (refer Exhibit 2 and Exhibit 4). March 2024 Complete 2. Journals We reviewed the journals across the year to identify those which had been posted by those with a higher level of access. We identified some journals which relate to former employees, however, they relate to interfaces with the ledger which are not actually posted but are automatic journals. Risk – there is a risk of fraud or error. Journals procedures should be reviewed to minimise the risk with the ability of members of the finance team to approve their own journals (refer Exhibit 8, point 1). October 2023 Not implemented A few senior officers are able to approve their own journals and the Council has accepted the risk this practice presents. We performed additional focussed audit testing to address the increased risk arising from this control weakness. No issues were identified in our detailed testing. Page 69 of 268
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Appendix 1. Action plan 2023/24 | 46 Issue/risk Recommendation and Agreed Action Progress 3. Bank reconciliations Bank reconciliations were performed for each month of the year but the reconciliations completed for periods 10 to 12 were not completed timeously. In addition, at the year-end we identified over 20 bank accounts (mainly imprest accounts) with small balances which were not reconciled to the ledger on a regular basis. Risk – there is a risk that errors may not be picked up and corrected timeously. There is also a risk that the Council is operating a number of bank accounts which are no longer required. The Council should ensure bank reconciliations are performed and reviewed in a timely manner. The Council should also consider the bank accounts held and if they are still required (refer Exhibit 8, point 2). October 2023 Partially implemented Revised action A full review of all bank accounts will be performed in 2024/25. Responsible officer: Chief Financial Officer Revised date: 31 March 2025 4. Payroll reconciliations The Council undertakes a reconciliation between the ledger and the payroll system on a monthly basis in line with good practice. We reviewed an example of one month’s reconciliation in 2022/23 and found limited evidence that the discrepancies between the ledger and payroll were being followed up or investigated on a timely basis. The Council should ensure any work conducted in reconciling the ledger to payroll is appropriately evidence. Implemented Page 70 of 268
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Appendix 1. Action plan 2023/24 | 47 Midlothian Council 2023/24 Annual Audit Report Audit Scotland’s published material is available for download on the website in a number of formats. For information on our accessibility principles, please visit: www.audit-scotland.gov.uk/accessibility For the latest news follow us on social media or subscribe to our email alerts. Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN Phone: 0131 625 1500 Email: info@audit-scotland.gov.uk www.audit-scotland.gov.uk AS.4.0 Page 71 of 268
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Audit Committee Monday 25 November 2024 Item 5.2 Annual Accounts for the year ended 31 March 2024 Report by David Gladwin, Chief Financial Officer & Section 95 Officer Report for Decision 1 Recommendation Audit Committee is recommended to approve the 2023/24 audited annual accounts for signature in light of the appointed auditor’s report for 2023/24. 2 Purpose of Report/Executive Summary The purpose of this report is to present the Council’s audited annual accounts for 2023/24 to Audit Committee and to provide a brief overview of findings during the audit process. 14th November 2024. Report Contact: David Gladwin Tel No 0131 271 3113 E mail david.gladwin@midlothian.gov.uk Page 73 of 268
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2 3 Background Council submitted its unaudited annual accounts to the external auditor by the required date of 30th June 2024 and they were examined in detail at Audit Committee on Monday 24th June 2024. 3.1 Regulations The Local Authority Accounts (Scotland) Regulations 2014 set out the requirements for completion, approval and signing of the accounts which are as follows. 10 (1) A local authority, or a committee of that authority whose remit includes audit or governance functions, must— (a) Meet to consider the audited Annual Accounts; and (b) Aim to approve those accounts for signature as described in this regulation no later than 30th September immediately following the financial year to which the accounts relate. 10 (2) That local authority or committee must consider whether the Annual Accounts should be signed, having regard to any report made on those accounts and any advice given by the proper officer or the auditor. 10 (3) immediately following the approval of the Annual Accounts for signature, the statements which form part of those accounts are to be signed and dated as follows— (a) the management commentary by the proper officer, the Chief Executive and the Leader of the Council; (b) the statement of responsibilities by the Leader of the Council and the proper officer, who must also certify the matters referred to in paragraphs (5) and (6) respectively; (c) the annual governance statement by the Chief Executive and the Leader of the Council; (d) the remuneration report by the Chief Executive and the Leader of the Council; and (e) the balance sheets by the proper officer, to authorise publication of the financial statements. 10 (4) Where a local authority does not have a Chief Executive or a Leader of the Council, the statements that paragraph (3) requires that person to sign are to be signed by such other person as it nominates for that purpose. 10 (5) The person who signs the statement of responsibilities as Leader of the Council must certify that the Annual Accounts have been approved for signature by, or on behalf of, the authority. 10 (6) The proper officer must certify that the financial statements give a true and fair view of the financial position of the local authority and its group at the end of the financial year and the transactions of the local authority and its group for that year. 10 (7) Following the signature of the Annual Accounts, the proper officer must provide the Annual Accounts, including the signed statements, to the auditor. 10 (8) Any further report provided by the auditor following the signature of the Annual Accounts which relates to those accounts must be considered by the local authority or a committee of that authority whose remit includes audit or governance functions. Due to additional challenges across the sector in completing and auditing financial statements during 2020/21 and 2021/22 Scottish Ministers agreed to an extension to statutory timescales. Whilst this does not extend into 2023/24 accounts, normal deadlines remain challenging for external auditors and some Scottish councils are still experiencing extended audit timescales. Local authorities are required Page 74 of 268
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3 to publish signed annual accounts no later than 31st October immediately following the financial year to which they relate. The accounts are presented to Audit Committee today as required by the regulations alongside the 2023/24 Annual Audit Report to Members and the Controller of Audit – year ended 31 March 2024 prepared by the appointed external auditor, Audit Scotland. The Annual Audit Report will also be presented to Council on Tuesday 17th December 2024. A copy of the audited accounts will be provided to all members of Council once they are signed. 3.2 Audit findings Audit Scotland have issued an unmodified audit opinion on the 2023/24 financial statements for the council and its group and provided positive comment on the standard of the accounts. Some areas for adjustment were identified during the audit process. None of these impact on cash reserves. The draft audited accounts are included at Appendix 1 to this report. Final review processes continue and any material change to the appended copy will be highlighted to Audit Committee before asking for approval. Adjustments to the Unaudited Financial Statements 3.2.1 Accumulated Absence Account Regulations allow a statutory adjustment to the Accumulated Absence Account for a financial assessment of the liability relating to unused annual leave at the balance sheet date. A calculation error in the draft accounts has been identified and corrected. The following correcting entries have been made to the financial statements: • Debit (Dr) Comprehensive Income and Expenditure Account - £2.797 million • Credit (Cr) Adjustments between accounting basis and funding bases – Accumulated Absences - £2.797 million • Cr Short-term Creditors - £2.797 million • Dr Accumulated Absence Account - £2.797 million. 3.2.2 Property, Plant and Equipment Valuations There is acceptance across the sector of a significant element of professional judgement and interpretation made by surveyors in valuing non-current assets. Asset valuation has been an area of detailed and sustained focus during the 2023/24 audit. Audit findings resulting in adjustments to the accounts are summarised below. Asset Condition Surveys The Council have been carrying out asset condition surveys for many of its assets as part of ongoing work to assess ongoing maintenance Page 75 of 268
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4 needs and priorities. These surveys also provide support for any decisions that elected members may consider relating to the continued use of assets whether in the ongoing re-fresh of the General Services Capital Plan or as budget savings measures. Completing survey work has been a priority. The timing of finalising condition survey results and the timing of work necessary to complete valuation information for inclusion in the Councils accounts has overlapped for 2023/24. As a consequence a number of assets, primarily schools, have been valued in the draft accounts using older condition ratings rather than up to date ratings which were finalised once the draft accounts had been prepared. Accounting practice requires the accounts to be adjusted for any material factors coming to light after the Balance Sheet date and survey findings of worsened condition in some assets triggered a necessary adjustment. Accordingly, the following adjustments have been made to the draft audited accounts: • Cr Property, Plant and Equipment - £19.476 million • Dr Revaluation Reserves - £19.476 million. Mixed Use Properties It is necessary for each distinct functional area of a building to be considered separately when valuing the overall asset. An example is a building that combines a frontline service with an administrative area like Stobhill Depot. Two buildings were identified for which split valuation bases should have applied. Correcting this generated the following entries: • Cr Property, Plant and Equipment - £1.061 million • Dr Revaluation Reserve - £1.061 million. Housing Stock Discount Factor Council house stock is valued on a current value basis determined using the basis of existing use value for social housing. Gross valuations are reduced by applying a discount factor which is designed to reflect that houses are only available for social use. The discount factor is recalculated annually. For context, the discount factor applied in 2023/24 reduced the value of Housing Stock by 66.64%. An error in one of the indices used to calculate the discount factor gave rise to an adjustment as shown below: • Dr Comprehensive Income and Expenditure Account (HRA) - £1.069 million • Cr Adjustments between accounting basis and funding basis – Depreciation and Impairment - £1.069 million • Cr Property, Plant and Equipment - £1.228 million • Dr Revaluation Reserve - £0.159 million • Dr Capital Adjustment Account - £1.069 million. 3.2.3 Group Accounts – Midlothian Energy Ltd (MEL) At the Balance Sheet date the Council had an investment in Midlothian Energy Ltd of £5.610 million. As the Council own 50% of MEL they Page 76 of 268
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5 form part of the Council’s group accounts and the investment value is replaced by a 50% share of the MEL’s net assets. The calculation of figures contained in the group accounts did not remove the £5.610 million investment correctly thus overstated the share of associates and joint ventures. The adjustment made to the group accounts is shown below. There is no adjustment required to the Council’s single entity accounts. • Cr Group Balance Sheet – Share of Net Assets of Associates and Joint Ventures - £5.610 million • Dr Group other comprehensive income and expenditure - £5.610 million 3.2.4 Non-Domestic Rate Account The creditor held in the accounts in respect of the difference between the expected Non-Domestic Rate (NDR) income between the Provisional Contributable Amount NDR return and the Notified return was incorrect, resulting in the following adjustment to the accounts. • Dr Short-term Creditors - £2.837 million • Cr Short-term Debtors - £2.837 million 3.3 Management Commentary, Remuneration Report, Annual Governance Statement and Disclosures As indicated by Audit Scotland the unaudited annual accounts were prepared to a good standard and were compliant with the Code and required disclosures. As part of the audit process, the Council’s finance team worked with Audit Scotland to make amendments and enhancements to the presentation of the financial statements. In addition, some helpful feedback was also received from users of the accounts and this has been reflected in the draft audited accounts. 4 Report Implications (Resource, Digital and Risk) 4.1 Resource Whilst this report deals with financial issues there are no financial implications arising directly from it. 4.2 Digital There are no digital issues arising directly from this report. 4.3 Risk Section 95 of the Local Government (Scotland) Act 1973 requires all Local Authorities in Scotland to have adequate systems and controls in place to ensure the proper administration of their financial affairs. The Council’s Standing Orders and Financial Regulations detail the responsibilities of members and officers in relation to the conduct of the Council’s financial affairs. 4.4 Ensuring Equalities There are no equality implications arising directly from this report. 4.5 Additional Report Implications Page 77 of 268
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6 See Appendix A APPENDIX A – Report Implications A.1 Key Priorities within the Single Midlothian Plan The financial statements set out the utilisation of resources committed to support the delivery of the key priorities in the single Midlothian Plan. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious None of the above A.4 Delivering Best Value The report does not directly impact on Delivering Best Value. A.5 Involving Communities and Other Stakeholders No consultation was required. A.6 Impact on Performance and Outcomes The proposals in this report do not directly impact on performance or outcomes. A.7 Adopting a Preventative Approach The proposals in this report do not directly impact on the adoption of a preventative approach. A.8 Supporting Sustainable Development There are no sustainability issues arising from this report. Page 78 of 268
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7 Appendix – Draft Audited Annual Accounts 2023/24 Page 79 of 268
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MIDLOTHIAN COUNCIL AUDITED ANNUAL ACCOUNTS 2023/24 Page 81 of 268
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Table of Contents Table of Contents Management Commentary ............................................................................................................................. 3 About Midlothian Council ........................................................................................................................... 3 Key Priorities and Objectives ...................................................................................................................... 4 Key Achievements and Highlights for 2023/24 ........................................................................................... 6 Financial Performance for 2023/24 ............................................................................................................ 6 Risk and Uncertainties Facing the Council ................................................................................................14 How the Council Manages Risk .................................................................................................................15 Looking Ahead ..........................................................................................................................................16 Conclusion .................................................................................................................................................17 Acknowledgements ..................................................................................................................................17 Statement of Responsibilities .......................................................................................................................18 Annual Governance Statement .....................................................................................................................19 Remuneration Report ...................................................................................................................................25 Remuneration of Councillors ....................................................................................................................25 Remuneration of Employees ....................................................................................................................26 Pension Benefits .......................................................................................................................................27 Remuneration of Other Employees by Pay Bands ....................................................................................29 Exit Packages .............................................................................................................................................29 Trade Union Facility Time .........................................................................................................................30 Independent Auditor’s Report ......................................................................................................................31 Expenditure and Funding Analysis ................................................................................................................32 Principal Financial Statements ......................................................................................................................33 Group and Council Comprehensive Income and Expenditure Statement ................................................34 Group and Council Movement In Reserves Statement ............................................................................35 Group and Council Balance Sheet .............................................................................................................36 Group and Council Cash Flow Statement .................................................................................................37 Notes to the Accounts ..................................................................................................................................38 1. Accounting Policies ...........................................................................................................................38 2. Accounting Standards Issued, Not Yet Adopted ..............................................................................51 3. Critical Judgements in Applying Accounting Policies .......................................................................52 4. Future Assumptions and Estimation Uncertainties ..........................................................................52 5. Events After the Reporting Period ...................................................................................................55 6. Note to the Expenditure and Funding Analysis ................................................................................55 7. Adjustments Between Accounting Basis and Funding Basis Under Regulations .............................57 8. Movement in Earmarked Reserves ..................................................................................................58 Page 82 of 268
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Table of Contents 9. Other Operating Income and Expenditure ...................................................................................59 10. Financing and Investment Income and Expenditure....................................................................59 11. Taxation and Non-specific Grant Income and Expenditure .........................................................59 12. Grant Income ...............................................................................................................................60 13. Expenditure and Income Analysed by Nature ..............................................................................60 14. Property, Plant and Equipment ....................................................................................................62 15. Infrastructure Assets ....................................................................................................................64 16. Heritage Assets.............................................................................................................................65 17. Intangible Assets ..........................................................................................................................65 18. Long-term Debtors .......................................................................................................................66 19. Financial Instruments ...................................................................................................................66 20. Nature and Extent of Risks Arising from Financial Instruments ...................................................70 21. Assets Held for Sale ......................................................................................................................73 22. Inventories ...................................................................................................................................73 23. Debtors .........................................................................................................................................74 24. Cash and Cash Equivalents ...........................................................................................................74 25. Creditors .......................................................................................................................................74 26. Provisions .....................................................................................................................................74 27. Grants Received in Advance .........................................................................................................75 28. Usable Reserves ...........................................................................................................................75 29. Unusable Reserves .......................................................................................................................75 30. External Audit Costs .....................................................................................................................78 31. Related Parties .............................................................................................................................78 32. Capital Expenditure and Capital Financing...................................................................................79 33. Public Private Partnership (PPP) and Similar Contracts ...............................................................80 34. Pension Schemes Accounted for as Defined Benefit Contribution Schemes ...............................83 35. Defined Benefit Pension Schemes ...............................................................................................83 36. Contingent Liabilities ....................................................................................................................88 37. Trusts, Bequests, Common Good and Community Funds ...........................................................89 38. Notes to the Group Accounts .......................................................................................................89 Supplementary Statements ..........................................................................................................................92 Housing Revenue Account ........................................................................................................................92 Council Tax Income Account .....................................................................................................................94 Non-Domestic Rate Account (NDR) ..........................................................................................................96 Glossary of Terms .........................................................................................................................................97 Page 83 of 268
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Management Commentary Management Commentary The Management Commentary is intended to assist users in understanding the objectives and strategy of the Council and provide a review of its business and financial performance for the year. It also outlines the principal risks and uncertainties which are likely to affect the future development and performance of the Council. The Annual Accounts present the financial position and performance of the Council demonstrating the stewardship of funds that support the Council’s vision and key priorities. The format and content of the Annual Accounts are prepared in accordance with Code of Practice in Local Authority Accounting in the United Kingdom. About Midlothian Council Midlothian Council is located south of Edinburgh centred on the main towns of Penicuik, Dalkeith, Bonnyrigg and Lasswade. One of the smaller local authority areas, but also the fastest growing, it has emerged as a world centre for the Bioscience industry. Midlothian population has grown by 16.1% between Census 2011 and 2022. Projections show a continued increase by a further 9.1% to 2043. Key facts about Midlothian are: MidlothianEmployees 5,100 Population 96,527 (Census 2022) Primary Schools 33 Secondary Schools 6 Elected Members 18 (SNP 8, Lab 7, Con 3) Page 84 of 268
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Management Commentary Council Service Structure Key Priorities and Objectives Midlothian Council’s key priorities and objectives are set out in the Single Midlothian Plan 2023-2027 (SMP). These priorities are delivered through the Community Planning Partnership (CPP), which sets out how we collaborate with communities and partners to deliver our vision for Midlothian to be a “Great Green Place to Grow.” The Single Midlothian Plan has identified its three main outcomes for the next four years: • Individuals and communities to have improved health and skills for learning, life and work; • No child or household should be living in poverty; • Considerable progress to be made towards net zero carbon emissions by 2030. These form the common and strategic guidance for the Council and its partners to encourage plans and measures to be developed to work towards enabling individuals and communities being able to lead healthier, safer and greener lives by 2030. The Community Planning Partnership is led by the Community Planning Board, on which a number of organisations sit and work together to achieve key actions towards seven thematic priorities across the four years, with a more focused approach in reducing poverty and collaborating with communities to increase wealth, reflecting the wellbeing and circular economy principles using a place based model. Dr Grace Vickers Chief Executive PEOPLE AND PARTNERSHIPS Fiona Robertson Executive Director Children, Young People and Parnerships Chief Education Officer Joan Tranent Chief Officer Children's Services, Partnerships and Commuinities Chief Social Work Officer Michelle Strong Chief Education Operating Officer Morag Barrow Joint Health and Social Care Chief Officer IJB Nick Clater Head of Adult Social Care Grace Cowan Head of Primary Care and Older People PLACE Kevin Anderson Executive Director Place Saty Kaur Chief Officer Corporate Solutions Derek Oliver Chief Officer Place Fiona Clandillion Head of Development FINANCE David Gladwin Chief Financial Officer Section 95 Officer Page 85 of 268
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Management Commentary The annual Balanced Scorecard measures progress towards these outcomes and is used to demonstrate ongoing improvements and reflect the ongoing challenges within Midlothian. The full detail behind the performance indicators measured by the balanced scorecard for 2023/24 can be found on the Council’s website Midlothian Council/Performance and spending. Page 86 of 268
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Management Commentary Key Achievements and Highlights for 2023/24 Achievement Commentary Lasswade High School and Lawfield Primary School being awarded the Gold School Sport Award for 2023-25. Led by Midlothian Active Schools Team, Sport Scotland School Sport Award is an assessment and planning tool which encourages schools to demonstrate an on-going commitment to increase young people’s opportunities and engagement in physical education, school sport and leadership and provide clear pathways to life-long participation in sport. Lasswade is the first of Midlothian’s High Schools to achieve the award. The gold school sport award is recognition of the school’s achievements in putting sport at the heart of schools planning, practice and ethos and is achieved through a combined team effort from the school’s Physical Education Departments, Midlothian Active Schools, the School Sports Council and the young people of the schools. £2.2 million grant award from Zero Waste Scotland Zero Waste Scotland is administering a £70 million Recycling Improvement Fund on behalf of Scottish Government, of which £2.2 million was offered to Midlothian Council. The grant will provide significant capital injection to affect service and transformational change. Neighbourhood Services colleagues have developed options for change to present to Council which address the population growth, the need to improve waste recycling rates and the need to reduce our carbon footprint. Learning Places Scotland national award for Midlothian’s Equipped for Learning Project This national award is for transforming learning, teaching and the curriculum. The council’s £10.5 million investment in equipping all young people with the digital skills they need for learning, life and work has seen more than 14,000 pupils benefit from a device for learning. Judges heard the project is changing lives and the good news is Midlothian families will also now be able to download free literacy support software to their own devices for free thanks to a world-first partnership between Midlothian Council and digital software supplier, Texthelp. This support, which is called Free for Families was launched during the financial year and you can find out more by watching this video. Midlothian Community Respiratory Team (CRT) and Midlothian Performance Team who won the Asthma/ Chronic Obstructive Pulmonary Disease (COPD) Project of the Year at the Scottish Healthcare Awards 2023 Their innovative project focussed on the use of data to provide a deeper understanding of the teams' functioning and their patient cohort. It also enabled the team to illustrate the benefits of having a CRT proactively support people who previously had not been known to the team and provided a platform of information on which to grow. The team provided evidence of the contribution made by CRTs to help people with COPD to stay at home safely, reducing admissions and bed days. Provision of Affordable Housing The Council’s Strategic Housing Investment Programme (SHIP) was submitted to the Scottish Government in October 2023. To address the need for affordable housing the SHIP details potential sites for 2,115 new affordable homes to be built during 2024-29. During 2023/24 233 new Council Houses were completed, this brings the total completed to 1,655 over the past 17 years, net of demolitions and disposals. In addition, twenty-seven properties were purchased during the year to add to the overall housing stock. Financial Performance for 2023/24 Financial information is part of the Council’s Performance Management Framework with the General Fund and Housing Revenue Account (HRA) financial performance regularly reported to Council. This section summarises our financial performance for 2023/24. Full details of the Council’s financial performance were reported to Council on 25 June 2024 and is available on the Council's website. Usable Reserves The Council holds funds in a number of Useable Reserves for various purposes. Details of the balances and prior year comparatives are shown in the table below, more detail can be found in the Movement in Reserves Statement on Page 35: Page 87 of 268
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Management Commentary Useable Reserve Purpose 2023/24 £000 2022/23 £000 General Fund Non-Earmarked Reserve Funds held as a general contingency. 2023/24 Service Concession Application Service Concession Retrospection. Anticipated Settlement of VAT Claim. 6,710 2,608 16,370 0 9,877 0 0 6,839 General Fund Earmarked Reserve Funds held for specific purposes (note 8). 20,650 18,247 Housing Revenue Account Funds held for investment in the Council’s housing stock. 33,182 32,143 Capital Fund Funds set aside for major capital developments or asset purchases. 17,242 20,107 Repairs and Renewals Fund Funds held for specific types of repairs and maintenance work. 4,113 4,138 General Fund Performance The General Fund is a statutory fund into which all the receipts of the Council are required to be paid and out of which all liabilities of the Council are to be met, except to the extent the statutory rules provide otherwise. Government grants, council tax income, fees and charges, non-domestic rates income (subject to pooling arrangements) and interest/returns on investments provide resources for the General Fund. The General Fund is split between non-earmarked balances (the level of funding available to the Council to manage financial risks and unplanned expenditure) and balances that are earmarked for specific purposes (see note 8). Actual outturns against budget for each of the Council’s General Fund Service areas as follows: General Fund Revenue Outturn 2023/24 Service Area Revised Budget £000 Net Expenditure £000 (Under)/Overspend £000 Management and Members 1,822 1,911 89 Place: Corporate Solutions 25,291 24,855 (436) Place 41,917 44,850 2,933 Central Costs 0 387 387 People & Partnerships: Midlothian Integration Joint Board 57,416 57,416 0 Adult Health & Social Care – Non-Delegated 664 615 (49) Children’s Services, Partnerships and Communities 18,606 18,610 4 Education 129,720 129,876 156 Lothian Valuation Joint Boards 582 562 (20) Non-distributable Costs 899 808 (91) General Services Net Expenditure 276,917 279,890 2,973 Loan Charges 4,435 1,591 (2,844) NDR Discretionary Relief 70 78 8 Investment Income (286) (209) 77 Allocations to HRA, Capital Account etc. (5,433) (5,771) (338) Total Expenditure 275,703 275,579 (124) Less Funding Scottish Government Grant 199,023 198,835 188 Council Tax 62,836 62,977 (141) Transfer from Housing Revenue Account 2,014 2,071 (57) Utilisation of Reserves 11,830 11,696 (134) Reserve Movement Opening Balance Movement Closing Balance Page 88 of 268
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Management Commentary General Fund Revenue Outturn 2023/24 Service Area Revised Budget £000 Net Expenditure £000 (Under)/Overspend £000 General Fund Reserve (MIRS) (34,963) 4,995 (29,968) Service Concessions (20,463) 4,093 (16,370) Total (55,426) 9,088 (46,338) The most significant areas contributing to the variances against budget in Council service areas were in relation to: • Volume and value of school pupil transport invoices were higher than budget by £1.157 million. A root and branch review of Council transport is underway as part of the Transformation Blueprint and the 2024/25 budget for pupil transport has increased in recognition that time is required to reduce existing costs; • Ageing fleet vehicles and higher volumes of external contracting than planned alongside external vehicle hire to support service continuity resulted in an overspend of £0.909 million. A Fleet maintenance review is underway; • Works to complete the Alpine coaster as part of the Destination Hillend project were not completed during the financial year due to external delays impacting on civil engineering works, resulting in an income shortfall of £0.483 million. The project team have since accelerated the coasters construction and the practical issues leading to a summer season opening are under close scrutiny; • Unit prices for electricity in 2023/24 as provided by Scotland Excel during the budget setting process are higher than budgeted, resulting in an overspend in energy costs of £0.444 million. • Loan Charges were underspent by £2.844 million in 2023/24. There are three main factors: • Higher than forecast and more sustained periods of surplus cash related directly to timing of capital expenditure thus providing opportunity to generate some deposit income; • Delays in in longer-term borrowing due to availability of existing funding to support capital programmes in 2023/24; and • Higher than budgeted deposit income from cash-backed reserves due to a significant increase in interest rates during 2023/24 relative to those expected when the budget was set. Full details of all other variances affecting the Final Outturn position can be found in the 25 June Council report Financial Monitoring 2023/24 - General Fund Revenue. Midlothian Council provide Midlothian Integration Joint Board an annual sum for services now managed by Midlothian Health and Social Care Partnership that were previously council managed. This sum is adjusted in-year in accordance with the integration scheme. Detailed commentary on the financial performance of the Midlothian Integration Joint Board is contained in their accounts. Summary Position The Council approved a Reserves Strategy in February 2019 setting the minimum level of uncommitted reserve of 2% of net expenditure (excluding resources delegated to Midlothian Integrated Joint Board), which now equates to £4.4 million. Reprofiling of debt in relation to PPP and similar contracts resulted in a gain in the general fund reserve of £16.371 million. In 2023/24 there was a decrease of £9.088 million in the General Fund Reserve, as shown in the table below. Movement in General Fund Reserve £000 2023/24 Performance against budget (134) Page 89 of 268
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Management Commentary Planned utilisation of reserves 24,123 Business transformation funding 433 Budget carried forward to 2024/25 (15,334) Total movement 9,088 Further details are provided in the Movement in Reserves Statement on Page 35. Housing Revenue Account Performance The Council has a statutory obligation to maintain a revenue account for its housing provision in accordance with the Housing (Scotland) Act 1987. The Housing Revenue Account records all income and expenditure relating to the Council’s own housing stock. Rents paid by tenants’ funds the revenue expenditure on housing management, repairs and maintenance and in part financing of capital expenditure. The table below provides analysis of financial performance for 2023/24: Housing Revenue Account Outturn 2023/24 Revised Budget £000 Net Expenditure £000 (Under)/Overspend £000 Expenditure: Repairs & Maintenance 8,389 9,306 917 Administration and Management 5,433 5,771 338 Loan Charges 14,484 13,345 (1,139) Other Expenses 2,808 3,702 894 Total Expenditure 31,114 32,124 1,010 Income: Council House Rents (32,819) (32,322) 497 Other Rents & Recharges (812) (841) (29) Total Income (33,631) (33,163) 468 Net Expenditure (Income) (2,517) (1,039) 1,478 Reserve Movement Opening Balance Movement Closing Balance HRA Reserve (32,143) (1,039) (33,182) Overall, the HRA showed an overspend at the year-end mainly due to: • Additional £0.917 million spend on repairs and maintenance in order to address Scottish Housing Quality Standard (SHQS) indicators, sustain continual improvement in void turnaround times and respond to an increase in dampness reports; • An increase in rechargeable costs in the General Fund resulted in increased administration and management costs of £0.338 million within the Housing Revenue Account; • An increase in levels of outstanding rent debt and an assessment of the collectability of this debt has resulted in an increase the provision for voids and irrecoverable rents of £0.375 million; • The provision for new claims in relation to winter and fire damage and an increase in premiums has resulted in an increase in the insurance liability of £0.227 million; • Reflection of latest New Social Housing delivery Programme resulting in lower than budgeted rental income of £0.497 million; • Lower overall borrowing requirements during 2023/24 and deferral of any borrowing until the latter part of the year, resulting in a reduction of debt costs of £1.139 million. The closing balance on the Housing Revenue Account reserve is £33.182 million which is committed to fund the Council’s ambitious capital investment plan currently running to 2038/39, to build further new housing Page 90 of 268
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Management Commentary stock and continue to improve and upgrade its existing stock, particularly through SHQS improvement and Energy Efficiency Standard for Social Housing (EESSH) works. The majority of this plan is funded through prudential borrowing with costs of borrowing met from rental income and planned utilisation of the HRA reserve, which is projected to reduce to approximately £2 million by the end of the plan. Reconciliation of General Fund and Housing Revenue Account Monitoring to the EFA The table below provides a reconciliation to assist users of the accounts to navigate from the Midlothian Council Budget Monitoring position on page 7 to the first column in the Expenditure and Funding Analysis (EFA) on page 32. The Expenditure and Funding Analysis provides the link between the Final Outturn reports and the figures in the Comprehensive Income and Expenditure Statement (CIES) by removing the various statutory adjustments required under generally accepted accounting practices. Final Outturn to EFA Reconciliation Service Area Final Outturn Net Expenditure £000 Internal Reporting Adjustments (see table below) £000 Figure Reported in EFA £000 Management and Members 1,911 (27) 1,884 Place: Corporate Solutions 24,855 (8,051) 16,804 Place 44,850 (3,057) 41,793 Central Costs 387 (74) 313 People & Partnerships: Midlothian Integrated Joint Board 57,416 0 57,416 Adult Health & Social Care – Non-Delegated 615 0 615 Children’s Services, Partnerships and Communities 18,610 0 18,610 Education 129,876 (9,890) 119,986 Lothian Valuation Joint Board 562 0 562 Non-distributable Costs 808 0 808 Add Back: Housing Revenue Account 0 (14,717) (14,717) Net Expenditure 279,890 (35,816) 244,074 Loan Charges 1,591 21,263 22,854 Investment Income (209) 0 (209) Allocations to HRA, Capital Account etc. (5,771) 5,771 0 HRA Transfer (2,071) 2,071 0 NDR Discretionary Relief 78 (78) 0 Scottish Government Grant (198,835) 79 (198,756) Council Tax Service concessions (62,977) 0 5,671 (2,608) (57,306) (2,608) Other Income and Expenditure (268,194) 32,169 (236,025) Utilisation of Reserves 11,696 (3,647) 8,049 Page 91 of 268
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Management Commentary Internal Reporting Adjustments Service Area HRA(1) £000 PPP(2) £000 Council Tax Reduction (3) £000 Other (4) £000 Total £000 Management and Members (27) 0 0 0 (27) Place: Corporate Solutions (2,380) 0 (5,671) 0 (8,051) Place (3,031) 300 0 (326) (3,057) Central Costs 0 0 0 (74) (74) People & Partnerships: Education 0 (9,890) 0 0 (9,890) Add Back: Housing Revenue Account (14,717) 0 0 0 (14,717) Net Expenditure (20,155) (9,590) (5,671) (400) (35,816) Loan Charges 11,274 9,590 0 399 21,263 NDR Discretionary Relief 0 0 0 (78) (78) Allocations to HRA, Capital Account etc. 5,771 0 0 0 5,771 HRA Transfer 2,071 0 0 0 2,071 Scottish Government Grant 0 0 0 79 79 Council Tax 0 0 5,671 0 5,671 In-year Service Concessions 0 0 0 (2,608) (2,608) Other Income and Expenditure 19,116 9,590 5,671 (2,208) 32,169 Utilisation of Reserves (1,039) 0 0 (2,608) (3,647) 1. For internal reporting purposes the Council reports on the Housing Revenue Account separately from the General Fund, this adjustment adds back in the Housing Revenue Account to reflect the structure reported in the Expenditure and Funding Analysis. 2. The Council has a number of PPP arrangements in place, accounting regulations require that we treat these arrangements as finance leases. This adjustment is reflected in the Expenditure and Funding analysis but not in the financial monitoring report as there is no requirement to do this adjustment for internal reporting purposes. 3. For internal reporting purposes the cost of the Council Tax Reduction Scheme is reflected as an expense against the service area, in the annual accounts this cost is offset against the Council Tax income received. 4. There is a reprofiling of PPP debt adjustment in relation to service concessions of £2.608 million and various non- material presentational adjustments. Capital Expenditure 2023/24 Capital expenditure represents the money spent by the Council for buying, upgrading or improving assets such as buildings and roads. The difference between capital and revenue expenditure is that the Council receives the benefit from capital expenditure over a period exceeding one year. In 2023/24 the final budget for General Services capital investment was £47.509 million (2022/23 £23.291 million), which was overspent by £0.147 million. The table below identifies actual capital spend during the financial year for key projects: Page 92 of 268
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Management Commentary 2022/23 2022/23 2023/24 2023/24 Revised Budget Actual Spend Revised Budget Actual Spend £000 £000 General Fund Capital Spend £000 £000 5,254 5,300 School Estate 26,047 26,241 5,833 5,833 Roads, Pavements and Street Lighting 2,007 2,007 1,059 1,059 Regeneration & Development 6,263 6,263 1,911 1,911 Fleet Replacement and Upgrades 5,137 5,137 1,869 1,869 Digital Assets 2,824 2,824 551 551 Transport, Energy and Infrastructure 2,358 2,340 837 837 Centralised Property Upgrades 599 599 5,977 5,962 Other Capital Projects 2,274 2,245 23,291 23,322 Total Spend 47,509 47,656 The table below demonstrates the breakdown of the Housing Revenue Account Capital Spend for 2023/24: 2022/23 Revised 2022/23 Actual 2023/24 Revised 2023/24 Actual Budget Spend Budget Spend £000 £000 Housing Capital Spend £000 £000 42,142 42,142 New Social Housing and Market Purchases 39,215 39,215 8,785 8,785 SHQS Improvement Works 9,837 9,837 826 783 Other Small Capital Projects 1,396 1,360 51,753 51,710 Total Spend 50,448 50,412 A combination of government grants, external funding contributions from third parties, capital receipts, Section 75 developer contributions and prudential borrowing funded this expenditure. Note 32 in the financial statements provides a full analysis of capital expenditure and the financing required. Treasury Management and Investment The Council is able to regulate its own capital spending limits within a prudential framework recommended by the Chartered Institute of Public Finance and Accountancy (CIPFA) and endorsed by Scottish Government, provided it operates within a series of indicators. The Council’s capital expenditure is a key driver of treasury management activity, and these indicators are relevant for the purposes of establishing an integrated treasury management strategy, which demonstrates that the Council’s capital investment plans are affordable, prudent and sustainable. Page 93 of 268
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Management Commentary Financial Indicator 2022/23 2023/24 Commentary Capital financing requirement – underlying need to borrow (excluding PFI/PPP/DBFM) £347.661m £401.845m Reflects the Council’s underlying need to borrow to finance capital expenditure incurred historically by the Council that has yet to be financed. Authorised Debt Limit £472.662m £534.105m This represents the maximum amount that the authority may borrow and is set at a level that reflects capital expenditure plans but includes headroom to allow for unusual cash movements. Actual external borrowing £321.753m £340.871m The actual external debt and long-term liabilities position of the Council. The actual figures should never exceed the Council’s Authorised Debt Limits, which are calculated in line with the requirements of the Prudential Code for Capital Finance in local authorities. Under / (Over) Borrowed £25.908m £60.974m This demonstrates that the Council’s capital borrowing requirement has not been fully funded by loan debt and is using cash from working capital to support capital programmes whilst interest rates on long-term fixed rate borrowing are high. Ratio of finance costs to net revenue stream – General Fund 0.38% 0.60% This is a measure of how affordable the Council’s capital plans are. It takes actual finance costs as a % of net revenue spend. Ratio of finance costs to net revenue stream – HRA 36.03% 40.24% As above excluding loans fund principal repayment holiday applied in 2022/23. External Loans Fund Interest Rate 3.01% 3.00% Average rate of interest paid on external debt. Internal Loans Fund Interest Rate 2.41% 2.08% This combines the interest paid by the Council on money borrowed, with the interest earned by the Council on money invested, along with other charges to arrive at a weighted average ‘loans fund rate’ figure for the council. The borrowing strategy is prepared in accordance with the Code of Practice on Treasury Management in Local Authorities. The majority of the Council’s borrowing comes from Public Works Loan Board (PWLB). Note 19 and Note 20 of the financial statements provides further details on the Council’s borrowing. Balance Sheet The table below summaries the Council’s Balance Sheet as at 31 March 2024. The Balance Sheet brings together assets and liabilities, year-end balances, money owed to and by the Council and reserves. More information on the balance sheet is provided on page 36. 31 March 24 31 March 23 Change £000 £000 £000 Long-term Assets 1,225,660 1,207,334 18,326 Current Assets 98,298 158,690 (60,392) Current Liabilities (96,872) (107,711) 10,839 Long-term Liabilities (432,401) (418,029) (14,372) Net Assets 794,685 840,284 (45,599) The main areas of movement in the net assets of the Council relate to the following areas. Pension Obligation The impact of the Local Government Pension Scheme and Scottish Teachers Superannuation Scheme on the Council’s accounts have been disclosed in Notes 34 and 35 to the accounts. As at 31 March 2024, the Council’s share of Lothian Pension Fund shows a net pension asset of £186.529 million (2022/23 pension asset £188.463 million). However, under the International Financial Reporting Interpretations Committee Page 94 of 268
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Management Commentary Standard 14 – The Limit of a Defined Benefit Asset (IFRIC 14) the actuary has calculated that the net present value of the future contributions of £1.485 billion exceeds the value of the future service costs of £1.398 billion, a negative contribution. As a result of this calculation, IFRIC 14 advises that no defined benefit plan asset should be recognised in the Council’s Balance Sheet and there is no requirement to recognise the £87.793 million difference as a liability, however, the Council is required to reflect the liability in relation to present value of unfunded obligations of £7.612 million and this figure is contained in the Balance Sheet. Formal actuarial valuations are conducted every three years, where each employer’s assets and liabilities are calculated on a detailed basis, using individual member data, for cash contribution setting purposes. The most recent formal valuation was March 2023 with the subsequent results based on a roll forward from the formal valuation. The movements in the pension valuation is due to a combination of applying the actual Pensions Increase order of 6.7% to the benefits, a slight increase in the discount rate of 0.05% and changes in demographic assumptions by the actuary. Long-term Assets Long-term Assets have increased in value by £18.326 million. This is primarily related to continued investment in new assets across the Council and increases in the value of our existing assets which have been revalued as part of our five-year rolling revaluation programme. Further details of these movements can be found in Notes 14-17 of the annual accounts. Current Assets – A reduction in short-term and liquid deposits within current assets to £57.522 million reflecting an increased level of internal borrowing in line with the Council’s Treasury Strategy. Long-term Liabilities – Long-term Borrowing Increase in the Council’s longer term borrowing of £18.481 million. Risk and Uncertainties Facing the Council Like all local authorities Midlothian Council is facing a period of unprecedented change and financial challenge with many factors affecting the need to adapt as an organisation. These pressures on demand for Council services are only likely to increase as it reacts to future challenges which have been exacerbated by the recent pandemic and a growing cost of living crises. Some of the challenges the Council face include: Risk and Uncertainty Commentary Continued Demographic Pressures Continued demographic pressures particularly around looked after children, people with learning disabilities, elderly care and the significant population growth in Midlothian. Increasing financial hardship is also expected due to the cost-of-living crisis resulting in an increase in the level of poverty rates. These pressures continue and present a considerable challenge to the Council in both financing them and transforming services to improve ways of managing some of the implications of these pressures. Requirement to maintain the physical condition of major capital assets The Council continues to monitor the impact on its capital programmes arising from supply chain difficulties and rising inflation, resulting in longer lead times and increased development costs. Social Care Reform Although the Scottish Government proposal is still in the early stages, such a major transformation will risk a diversion from tackling immediate challenges within the Social Care sector. There is still concern about the destination of the policy and future of funding for Councils. Long-term impact on the local economy following the Covid-19 pandemic and leaving the European Union It is difficult to untangle the combined impacts of leaving the European Union and Covid-19, however both have contributed to a supply shock leading to the Council facing higher prices and shortages of key resources, particularly in the construction and care sectors. The Council remains uncertain about the long- Page 95 of 268
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Management Commentary Risk and Uncertainty Commentary term effect of leaving the European Union and Covid-19 but are continuing to monitor the impact on its services and citizens. Climate Change The Council recognises that climate change is an urgent issue and has committed to be carbon neutral by 2030, this is an ambitious target and will require significant investment and resource to achieve this by the specified deadline. Financial Pressures Pay, other inflation and Scottish Government Grant Income projections are critical areas of modelling given their overall significance and uncertainty. For 2023/24, and again for 2024/25, the Scottish Government published a one- year budget and grant settlement. In respect of grant support to Councils indications are that settlements will remain at, or close to, a cash flat level through to 2027/28. This represents a challenging outlook for local government with a real term’s reduction in grant income at a time when costs and service demands continue to rise. There are a number of factors, which will continue to influence the actual level of grant support the Council might expect. Among these will be a range of economic factors which will influence the resources Scottish Government has at its disposal, whether from the UK Government block grant or through tax revenues directly controlled by Scottish Government. The other main factors will be the taxation and spending priorities of the Scottish Government. Whilst an assessment of economic factors can be made at this time, based on various sets of published information the impact of Scottish Government’s tax and spending priorities will only become apparent when the Scottish Government’s 2025/26 budget is published later in 2024. In February 2024, the Council set a balanced budget for 2024/25 which included a council tax freeze for the financial year and use of one-off fiscal flexibilities relating to service concessions. In the context of reduced real terms external funding and growth in demand for services, the Council has a considerable challenge to ensure its future expenditure plans are financially sustainable. Updated Medium Term Financial Strategy (MTFS) forecasts show a budget gap of £20.6 million for the period to 2028/29. Further infrastructure requirements, some of which will prove essential, will increase the gap further. How the Council Manages Risk Action Commentary Service Risk Registers The service Risk Registers contain operational risks and are managed by each Service Management Team. The Risk Management Group provides further scrutiny of service risks and significant risks are added to the corporate risk register. The Corporate Risk Register The Corporate Risk Register managed by the Corporate Management Team provides assurance through scrutiny and challenge and ensures that the significant risks facing the Council have been identified and effective treatment actions are implemented. The Corporate Risk Register is then submitted to Audit Committee for approval which provides effective scrutiny and challenge as part of the Council’s corporate governance arrangements. Development of a Medium-Term Financial Strategy The Council’s Long Term financial outlook highlights significant funding pressure that the Council may face over the next few years. On 27 Feb 2024 Council agreed a Medium-term Financial Strategy 2024/25-2028/29 , which set out budget projections for 2024/25-2028/29 and showed a budget gap over the period of £20.9 million. Projections continue to be refined on a regular basis with the latest figures showing a gap of £9.4m in 2025/26 rising to £20.9m by 2028/29. The MTFS sets out cost projections for pay inflation, price inflation, debt charges and the impact of demographic changes together with projections Page 96 of 268
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Management Commentary Action Commentary of income. As a framework to address the financial challenge, Council approved a Transformation Blueprint which contains five main strategic themes of Following the Money, 21st Century Workforce, Commercialisation and Income Generation, Workplaces of the Future and Multi-Agency Transformation. Within each theme sits a number of individual projects phased over the next two financial years with eight having commenced in quarter 1 of 2023/24. Council will also continue to explore any options to increase external funding including ongoing discussion with the Scottish Government on funding fast growing Councils. Looking Ahead Economic performance has a significant impact on the availability of funding and demand for public services. The February 2024 Bank of England monetary report states that although services price inflation and wage growth have fallen, key indicators of inflation persistence remain elevated. As a result monetary policy will need to remain restrictive for the sufficiently long to return inflation to the 2% target sustainability in the medium term in line with the Monetary Policy Committees remit. In addition, Midlothian Council also faces additional pressure being the fastest growing local authority in Scotland, resulting in greater demand for services with future funding for Local Government likely to remain severely constrained. The Council’s Capital Plan remains under pressure but contains further major investment in the following areas over the coming years: Capital Expenditure Commentary School Infrastructure • Equipped for Learning Programme; • Wide-ranging school building, extension and refurbishment programme; • A replacement of Beeslack Community High School and refurbishment of Penicuik High School; • Replacement schools for Mayfield Campus and Lasswade Primary. Provision of Care Services A new care facility in Bonnyrigg which will provide accommodation for those in need of high quality care. Carriageway and footway infrastructure • Continuing investment in improved roads, footpaths and lighting across Midlothian; • As part of the Edinburgh and South East Scotland City Region Deal major investment is also planned in the new A701 Relief Road and A702 link which will support planned investment in new research and technology facilities at Easter Bush. Social Housing • A continuation of the new build housing programme and upgrading of existing housing. The Council has recognised the need for a strategic step change in the form of the Medium-Term Financial Plan together with resource allocation measures that will enable the Council to balance revenue budgets for each financial year. The Council continues to regularly monitor its financial position and provide full financial updates to the Corporate Management Team and the elected members as appropriate, including options on addressing any new budgetary and spending pressures. This may include further use of reserves, reallocation of committed reserves, changes to capital spend, or other cost savings. Management is continuing to engage with Scottish Government and COSLA on providing sustainable funding going forward. The Council will continue to assess the potential impact of the external risks and challenges facing the Council, including the possible financial and economic impacts. From a financial perspective, the potential Page 97 of 268
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Management Commentary impact on future Scottish Government grant funding levels, and from an economic perspective, the potential lack of skilled resource and the impact on the local economy. In delivering services, it is important to recognise that people are our most important asset. Our people have the potential to have a positive impact every day and can deliver life-changing impacts for our communities. Therefore, to maximise that positive impact, it is imperative that we work as One Council by removing any institutional barriers; and eliminate silo working to enable the organisation to implement simple solutions which make a big difference. This means placing our citizens and communities at the centre of our daily work; growing our own talent and empowering our staff and thereby enabling Midlothian to fulfil its potential as a ‘Green Great Place to Grow.’ Conclusion Budget constraints and increasing cost pressures are putting Scotland’s councils’ finances under a severe strain; a point recently recognised by Audit Scotland in a report to the Accounts Commission on Local Government Budget 2024/25. COSLA have continued to highlight that funding in the Local Government Finance Settlement falls short of the amount required to protect local services. Adding to the challenge of constrained funding, Midlothian Council continues to face the impacts of a global pandemic as well as long- standing and growing demographic pressures and a cost-of-living crisis thus placing increasing pressures on Council resources and demand for its services. Despite these pressures, the Council made significant improvements across a range of service areas and continued to invest for the future in its asset base to provide essential infrastructure to support the growing population. It is important to appreciate these improvements. We have concluded the year in a period of unprecedented uncertainty, facing enormous financial challenge but with a focus on meeting the financial and service challenges identified in the Medium-Term Financial Strategy and Transformation Blueprint to ensure the Council has longer term financial sustainability. Acknowledgements We would like to acknowledge the tremendous effort undertaken in producing the Annual Accounts and express my thanks to my own team and to colleagues throughout the Council for the significant dedication and commitment shown throughout the year in financial matters. _____________________ _____________________ _____________________ David Gladwin Dr Grace Vickers Councillor Kelly Parry Chief Financial Officer Chief Executive Leader of the Council Page 98 of 268
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Statement of Responsibilities Statement of Responsibilities The Council’s Responsibilities The Council is required to: • Make arrangements for the proper administration of its financial affairs and to secure that one of its officers has the responsibility for the administration of those affairs. In this Council, that officer is the Chief Financial Officer; • Manage its affairs to secure economic, efficient and effective use of resources and safeguard its assets. I certify that the Annual Accounts have been approved for signature by, or on behalf of, the authority. ___________________________ Councillor Kelly Parry Leader of the Council The Chief Financial Officer Responsibilities The Chief Financial Officer is responsible for the preparation of the Council’s Annual Accounts in accordance with proper practices as required by legislation and as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom (the code). In preparing these Annual Accounts, the Chief Financial Officer has: • Selected suitable accounting policies and then applied them consistently; • Made judgements and estimates that were reasonable and prudent; • Complied with the local authority code; • Kept proper accounting records, which were up to date; • Taken reasonable steps for the prevention and detection of fraud and other irregularities. I certify that the financial statements present a true and fair view of the financial position of the Council (and its group) at the reporting date and the transactions of the Council (and its group) for the year ended 31 March 2024. ___________________________ David Gladwin Chief Financial Officer Page 99 of 268
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Annual Governance Statement Annual Governance Statement Introduction The Annual Governance Statement explains how the Council has complied with the terms of the CIPFA/SOLACE Framework (2016) for the year ended 31 March 2024, sets out the Council’s governance arrangements and systems of internal control, and reports on their effectiveness. The statement also covers relevant governance matters as they affect those entities included as part of the Council’s Group Accounts. Scope of Responsibility Midlothian Council is responsible for ensuring that its business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for. The Council also has a statutory duty of Best Value under the Local Government in Scotland Act 2003 to make arrangements to secure continuous improvement and performance, while maintaining an appropriate balance between quality and cost; and in making these arrangements and securing that balance, to have regard to economy, efficiency and effectiveness. In discharging this overall responsibility, elected members and senior officers are responsible for putting in place proper arrangements for the governance of Midlothian Council’s affairs and facilitating the exercise of its functions in a timely, inclusive, open, honest and accountable manner. This includes setting the strategic direction, vision, culture and values of the Council, effective operation of corporate systems, processes and internal controls, engaging with and, where appropriate, lead communities, monitoring whether strategic objectives have been achieved and services delivered cost effectively, and ensuring that appropriate arrangements are in place for the management of risk. The system can only provide reasonable and not absolute assurance of effectiveness. Framework for Good Governance The overall aim of the CIPFA/SOLACE Framework ‘Delivering Good Governance in Local Government’ (2016) is to ensure that: resources are directed in accordance with agreed policy and according to priorities; there is sound and inclusive decision making; and there is clear accountability for the use of those resources in order to achieve desired outcomes for service users and communities. The Framework defines the seven core principles of good governance, namely: A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule of law; B. Ensuring openness and comprehensive stakeholder engagement; C. Defining outcomes in terms of sustainable economic, social, and environmental benefits; D. Determining the interventions necessary to optimise the achievement of the intended outcomes; E. Developing the entity’s capacity, including the capability of its leadership and the individuals within it; F. Managing risks and performance through robust internal control and strong public financial management; and G. Implementing good practices in transparency, reporting, and audit to deliver effective accountability. Page 100 of 268
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Annual Governance Statement The Council’s Local Code of Corporate Governance, which is consistent with the principles and recommendations of the CIPFA/SOLACE Framework and the supporting guidance notes for Scottish authorities (November 2016), and was approved by Council in March 2021. The Council’s Governance Framework The key elements of the Council’s governance arrangements, as set out in the Council’s Local Code of Corporate Governance, include: A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting rule of law The roles and responsibilities of elected members and officers and the processes to govern the conduct of the Council’s business are defined in standing orders and scheme of delegation for officers, scheme of administration, and financial regulations. Codes of conduct are in place for and define the high ethical values and standards of behaviour expected from elected members and officers to make sure that public business is conducted with fairness and integrity. The Monitoring Officer is responsible for ensuring that agreed procedures are followed and that all applicable statutes and regulations are complied with. The Standards Committee is responsible for dealing with matters relating to conduct and ethical standards. The Council seeks feedback from the public through its complaints and comments procedures for Corporate and Social Work (statutory) service areas, responds to the outcomes, as appropriate, and reports the results annually. Professional advice on the discharge of statutory social work duties was provided during the year to the Council by the Chief Officer Children’s Services, Partnerships and Communities (Chief Social Work Officer). The CSWO promotes values and standards of professional practice and acts as the 'agency decision maker' taking final decisions on a range of social work matters including adoption, secure accommodation, guardianship, etc. The CSWO reports annually on the statutory work undertaken, regulation and inspection, workforce issues and significant social policy themes. B. Ensuring openness and comprehensive stakeholder engagement Council meetings are held in public unless there are good reasons for not doing so on the grounds of confidentiality. When Council and Committee meetings are held using a virtual platform, they are live- streamed to ensure public access, and recordings can be accessed from the Council’s website. Unless confidential, decisions made by Council or other Committees are documented in the public domain. All decisions are explicit about the criteria, rationale and considerations used. The impact and consequences of all decisions are clearly set out. The Council seeks community views on a wide range of issues and undertakes regular consultation and engagement with citizens and service users. C. Defining outcomes in terms of sustainable economic, social, and environmental benefits The Council’s vision, strategic objectives and priorities are set out in the Single Midlothian Plan developed through the Community Planning Partnership (of which the Council is a partner). The Council’s Medium Term Financial Strategy and Service Plans outline how Midlothian Council will deliver its contribution to the Single Midlothian Plan. In June 2023, the Council also approved a Transformation Blueprint 2023-2028 to support the Medium Term Financial Strategy and help bridge the projected five-year funding gap. Page 101 of 268
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Annual Governance Statement Capital investment at a strategic level is structured to consider and balance the combined economic, social and environmental impact of policies and plans when taking decisions about service provision. Asset management planning is being developed to support this. The Council supports community empowerment and recognises the importance of building community capacity and volunteering as a key factor in building stronger, safer, and supportive communities. Implications are considered during the decision making process within the standard report template covering Resources, Risk, Single Midlothian Plan and Key Priorities, Impact on Performance and Outcomes, Adopting a Preventative Approach, Involving Communities and Other Stakeholders, Ensuring Equalities, Supporting Sustainable Development, and IT issues. D. Determining the interventions necessary to optimise the achievement of the intended outcomes Decision makers receive detailed information indicating how intended outcomes would be achieved together with the risks, financial and other implications associated with the proposals, by way of the compulsory sections of the Committee report template. In determining how services and other courses of action should be planned and delivered the Council is increasingly engaging with internal and external stakeholders. The Council fosters effective relationships, collaborative working and contractual arrangements with other public, private, and voluntary organisations in delivering services that meet the needs of the local community including the achievement of ‘social value’ (community benefits) through service planning and commissioning. E. Developing the entity’s capacity, including the capability of its leadership and the individuals within it The roles of officers are defined in agreed job descriptions. Staff performance is reviewed on an annual basis in accordance with the relevant appraisal processes in place during the year. The Chief Executive is responsible and accountable to the Council for all aspects of management including promoting sound governance, providing quality information/support to inform decision making and scrutiny, supporting other statutory officers, and building relationships with all Councillors. The Elected Members Induction Programme took place following elections in May 2022 and is periodically supplemented by training events, seminars and briefings. Members appointed to certain committees have also received specific training related to the responsibilities on these committees e.g. licensing, planning, audit. F. Managing risks and performance through robust internal control & strong public financial management The Council has overall responsibility for directing and controlling the organisation. The Cabinet is the principal decision-making committee of the Council. The Performance Review and Scrutiny Committee is responsible for reviewing performance against policy objectives and commenting on decisions and policies and their impact. The Council updated its Risk Management policy and strategy in August 2022 whose main priorities are the robust systems of identification, evaluation and control of risks which threaten the Council’s ability to meet its objectives to deliver services to the public. Internal Audit’s assessment in March 2024 was that assurance is substantial in relation to the Council’s Risk Management Policy and application of the policy at a strategic level. The Chief Financial Officer (the Section 95 officer) is responsible for the proper administration of all aspects of the Council’s financial affairs including ensuring appropriate advice is given to the Council on all financial matters. Page 102 of 268
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Annual Governance Statement The Council’s system of internal financial control is based on a framework of financial regulations (updated in June 2022), regular management information, administrative procedures (including segregation of duties), management supervision and a system of delegation and accountability. This remains reliant on the staff within the framework to ensure management supervision and accountability are diligently enforced. The Council has an approved strategy to tackling fraud, theft, corruption and crime, as an integral part of protecting public finances, safeguarding assets, and delivering services effectively. A Medium Term Financial Strategy was approved by Council in June 2019. The 2023/24 budget was approved by Council in February 2023. Given the significant fiscal challenges which lie ahead a Blueprint/Strategic Plan has been agreed and this is aligned to the Medium Term Financial Strategy. This informs the revised service plans, workforce plans and the long term sustainability of services. Current assessment of a budget gap of approximately £20.9 million for the Council over the next 5 years will place unprecedented financial pressure on the Council which will require difficult decisions to be made in relation to both Capital and Revenue Budgets. The previous Chief Officer Corporate Solutions carried out a self-assessment against the CIPFA FM code and reported the findings of this to CMT in September 2021 and this was subsequently reported to Audit Committee in December 2021. The Chief Officer Corporate Solutions identified six areas requiring improvement from his review of the CIPFA FM code. Actions identified included improving the resourcing of the Procurement team (Ongoing), updating the Council’s Financial Regulations and Directives (Complete – approved at June 2022 Council), putting in place a multi-year financial plan (Ongoing – action relevant to two sections of the FM Code), improving the Council’s approach to lessons learned from completed projects (Ongoing), and improving the Council’s risk management arrangements (Ongoing). No further Committee update has been provided within the 2023/24 financial year. Revenue and Capital Budget Monitoring reports are presented to the Council on a quarterly basis for monitoring and control purposes including the annual outturn. The Management Commentary in the Statement of Accounts provides financial and other performance information regarding the operation of the Council, its wider achievements and areas for development. G. Implementing good practices in transparency, reporting, & audit to deliver effective accountability The independent and objective audit opinion of the Chief Internal Auditor (Chief Audit Executive) is stated within the Internal Audit Annual Assurance Report 2023/24. This is based on work carried out by an in- house team, with supplementary support from an outsourced partner, including shared services resources from East Lothian Council, in conformance with the Public Sector Internal Audit Standards to fulfil statutory Internal Audit provision. The Council responds to the findings and recommendations of Internal Audit, External Audit, Scrutiny and Inspection bodies including associated Action Plans for improvement. The Audit Committee is integral to overseeing independent and objective assurance and monitoring improvements in internal control and governance. Quarterly Performance Reports were presented to the Performance, Review and Scrutiny Committee for monitoring the achievement of strategic priorities and key performance indicators. The Annual Accounts and Report sets out the financial position in accordance with relevant accounting regulations. Page 103 of 268
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Annual Governance Statement Review of Adequacy and Effectiveness of the Council’s Governance Framework An annual review of the adequacy and effectiveness of the Council’s overall governance framework has been carried out. The output is this Annual Governance Statement which is presented to the Audit Committee. The review was further informed by assurances from: assessment of compliance against the Local Code; written assurance statements from the Executive Directors; Internal Audit annual opinion, findings and recommendations; External Audit, and comments and recommendations made by External Auditor and other external scrutiny bodies and inspection agencies. In respect of the implementation of the remaining Best Value Audit Actions (nos. 1-4 improvement areas of governance identified by the Council in 2020/21), a Best Value Assurance Update Report by the Chief Executive was presented to Council in June 2021. This set out further progress to address the recommendations made in order to demonstrate Best Value. These actions are now all materially completed. The Council however recognises improvements are required in the areas presented below. Improvement Areas of Governance The collective review activity outlined above has identified the following areas where improvement in governance arrangements can continue to be made to enhance compliance with the Council’s Local Code of Corporate Governance and to demonstrate Best Value: 1) The pr previous Chief Officer Corporate Solutions carried out a self-assessment against the CIPFA FM code and reported the findings of this to CMT in September 2021 and this was subsequently reported to Audit Committee in December 2021. One of the actions identified was putting in place a multi-year financial plan. The Council’s subsequently approved a 2023-2028 Strategic Blueprint in June 2023, aligned to the Medium Term Financial Strategy. This will then inform the revised service plans, workforce plans and the long term sustainability of services. Current assessment of a budget gap of approximately £20.9 million for the Council over the next 5 years requires regular monitoring and updating of the multi-year financial projections working towards approved financial plans key to developing the Council on a sustainable basis. Dedicated Financial Management CMT meetings have been implemented on a quarterly basis to challenge and scrutinise budgets in order to improve financial discipline. 2) Improvements in the Procurement Service staff capacity have been made during the year. With increased team capacity issues of off contract spend and non-contracted spend within the organisation are being progressed, however further purchasing and procurement issues continue to be noted. Expired contracts and off contracts spend is being managed through regular review at Budget Boards who work to ensure that the risk is managed and the appropriate remedial action is being taken; with oversight from the Executive Director and Chief Officers. In addition as part of the Council’s Blueprint under theme1 follow the money a sprint looking at contract management and a review of transport is being progressed. 3) Capital Plan Affordability review continues as the paper that was approved by Council on 27 February 2024, detailed that the Loan Charges arising from capital expenditure within the General Services Capital Plan, including planned Learning Estate Programme projects that are under development is expected to exceed the Loan Charges levels as per the Council’s approved Medium Term Financial Strategy over the period 2024/25 to 2028/29. Work Continues to establish an approved affordable and financially sustainable Capital Plan for the Council moving forward. Whilst approval for fully funded learning estates projects has been progressed delays in decision Page 104 of 268
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Annual Governance Statement to critical projects may result in breaches of capacity to provide education provision across the council area. 4) Workforce planning to address appropriate resource requirements, recruitment, retention, training, leadership development and resilience is taking place. However, it has been noted that there is a lack of resource within the Compliance Team to deliver the Council’s statutory responsibilities under the Data Protection Act 2018. CMT approved a paper to identify additional resource on 5 June and these requirements are now being implemented along with support for the Council tax and Procurement teams to meet identified control needs and, in both cases, this is a continuing process. It is the responsibility of service managers and Chief Officers to ensure that service risk registers are up to date, this is now being prioritised in order to ensure that all registers are up to date. Conclusion and Opinion on Assurance The conclusion from the review activity completed and subject to the successful progression of the areas for improvement highlighted above, our opinion is that reasonable assurance can be placed upon the adequacy and effectiveness of Midlothian Council’s systems of governance, risk management and internal control. Although areas for further improvement have been identified, the annual review demonstrates sufficient evidence that the Council’s Local Code of Corporate Governance is operating effectively and that the Council complies with that Local Code in most respects to meet its principal objectives. Systems are in place to regularly review and improve governance arrangements and the system of internal control. _______________________ ______________________ Dr Grace Vickers Kelly Parry Chief Executive Leader of the Council Page 105 of 268
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Remuneration Report Remuneration Report The Local Authority Accounts (Scotland) Regulations 2014 require local authorities in Scotland to prepare a Remuneration Report as part of the annual statutory accounts. The following report details Midlothian Council’s remuneration policy for its senior councillors and senior employees, providing full details of the remuneration and pension benefits they receive. This report also provides information on the number of employees whose annual remuneration was £50,000 or more as well as summary information in relation to employees’ exit packages agreed during the year. Information disclosed in the tables in this report is subject to audit by Audit Scotland to report on whether that information has been properly prepared in accordance with the Local Authority Accounts (Scotland) Regulations 2014 (with the exception of the table in note 4.4). All other sections of the Remuneration Report, including the table in respect of Trade Union Facility Time, are read and considered to identify any material inconsistencies with the financial statements. Remuneration of Councillors The remuneration of Councillors is regulated by the Local Governance (Scotland) Act 2004 (Remuneration) Regulations 2007 (SSI No 2007/183) as amended. The Regulations provide for the grading of councillors for the purposes of remuneration arrangements, as Leader of the Council, Provost, Senior Councillors or Councillors. The Leader of the Council and the Provost cannot be the same person for the purposes of payment of remuneration. A Senior Councillor is a Councillor who holds a significant position of responsibility within the Council’s political structure. The Regulations permit the Council to remunerate one Leader of the Council and one Provost. For 2023/24 the Regulations set the salary for the Leader of Midlothian Council £33,503 (2022/23 £32,622) and the salary for the Provost was set at £25,128 (2022/23 £24,467), the maximum level. The Regulations also set out the remuneration that may be paid to Senior Councillors and total number of Senior Councillors the Council may have. The maximum yearly amount that may be paid to a Senior Councillor is 75% of the total yearly amount payable to the Leader of the Council. For 2023/24, the maximum salary which could be paid to a Senior Councillor was £25,128 (2022/23 £24,467) with the maximum number of Senior Councillors set at eight (excluding the Provost and the Leader). The total remuneration for Senior Councillors (excluding the Provost and the Leader) should not exceed £180,905 (2022/23 £176,150). The Council is able to exercise local flexibility in the determination of the precise number of Senior Councillors and their salary within these maximum limits. The Regulations also permit the Council to pay contributions or other payments as required to the Local Government Pension Scheme in respect of those Councillors who elect to become Councillor Members of the pension scheme. In addition to the Senior Councillors of the Council, the regulations also set out the remuneration payable to Councillors with the responsibility of a Convener or a Vice-Convener of a Joint Board. The Regulations require the remuneration and any pension contributions, if a member of the Local Government Pension Scheme, to be paid by the Council of which the Convener and Vice-Convener is a member. The Council is reimbursed by the Joint Board for any additional remuneration paid to a member from being a Convener or Vice-Convener of a Joint Board. Details of the Remuneration of Council Leader, Provost and Senior Councillors are shown in the table below: Page 106 of 268
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Remuneration Report Councillor Name and Responsibility Salary Expenses Total Remuneration 2023/24 Total Remuneration 2022/23 Senior Councillor (Apr 23 – Mar 24) K Parry: Council Leader £33,503 £23 £33,526 £30,758 D McCall: Provost £25,128 £128 £25,256 £23,881 D Virgo: Group Leader £22,614 £145 £22,759 £19,824 D Alexander: Cabinet Member £22,614 £178 £22,792 £21,826 C McManus: Cabinet Member (1) £22,614 £110 £22,724 £17,749 E Scott: Cabinet Member £22,614 £105 £22,719 £19,846 S McKenzie: Cabinet Member £22,614 £0 £22,614 £21,679 D Milligan: Group Leader £22,614 £338 £22,952 £23,189 R Imrie: Chair of Planning Committee £22,614 £210 £22,824 £22,186 C Cassidy: Depute Leader and Group Leader £22,614 £32 £22,646 £22,174 Total £239,543 £1,269 £240,812 £223,112 Notes (1) On 21 Mar 2023 D Bowen resigned as Cabinet Member and assumed the role of Depute Provost, the vacant Cabinet post was subsequently filled by C McManus. The total remuneration of all the Council’s elected members (including Senior Councillors above) and including all business expenses for 2023/24 was £0.402 Million (2022/23 £0.391 million). Detailed figures for these costs are available on the Council’s website, members' remuneration details for 2023/24. Remuneration of Employees The salary of senior employees is set by reference to national arrangements. The Scottish Joint Committee (SJC) for Local Authority Services sets the salaries for the Chief Executives of Scottish Local Authorities. The salaries of the Executive Directors, Chief Officers and Heads of Service are all now based on a fixed percentage of the Chief Executives salary. The salaries of all other employees are set by reference to: • Teaching staff – The Scottish Negotiating Committee for Teachers (SNCT); • Other staff – The Scottish Joint Committee (SJC). The table below details the remuneration paid to Senior Employees (as defined in the regulations) of the Council during the financial year: Senior Employee Name and Responsibility Total Salary, Fees and Allowances 2023/24 Total Remuneration 2022/23 Full Year (Apr 23-Mar 24) G Vickers: Chief Executive £133,135 £125,540 G Vickers: Returning Officer £0 £3,007 M Barrow: Joint Director: Health and Social Care (1) £55,822 £52,699 K Anderson: Executive Director: Place £116,353 £109,715 F Robertson: Executive Director: Children, Young People and Communities £116,353 £109,715 J Tranent: Chief Officer: Children’s Services, Partnerships and Communities (Chief Social Work Officer) £98,349 £92,738 D Gladwin: Chief Financial Officer (S95 Officer) £95,000 £81,928 A Turpie: Legal Services Manager (Monitoring Officer) £76,661 £70,312 Total £691,673 £645,654 Notes: (1) Post joint funded with NHS Lothian, M Barrow Full time Equivalent £111,644. Page 107 of 268
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Remuneration Report Subsidiary Entities None of our subsidiaries have remunerated employees. Pension Benefits Pension benefits for Councillors and local government employees are provided through the Local Government Pension Scheme (LGPS), which is administered by the Lothian Pension Fund. From 1 April 2015, this became a career average salary pension scheme, although it was a final salary scheme until that date. This means that pension benefits are based on an average of the pay over the number of years that a person has been a member of the scheme. From 1 April 2009, a five-tier contribution system is in place with contributions from scheme members based on how much pay falls into each tier. This is designed to give more equality between costs and benefits of scheme membership. Part-time workers contribution rates are worked out on the whole time pay rate for the job, with actual contributions paid on actual pay earned. The tiers and contribution rates are as follows: Pensionable Pay 2023/24 Contribution Rate On earnings up to and including £25,300 5.5% On earnings above £25,301 and up to £31,000 7.25% On earnings above £31,001 and up to £42,500 8.5% On earnings above £42,501 and up to £56,600 9.5% On earnings above £56,601 12% There is no automatic lump sum on retirement. Pension scheme members may opt to commute pension for a lump sum payment up to the limits set by the Finance Act 2004. The rate and basis at which employees accrue their pension benefits has changed over time, this is shown in the table below: Pension Benefit Pension Benefit Time Period Accrual Basis Accrual Rate Lump Sum Basis From 1 April 2015 Career Average 1/49th pensionable pay each year n/a From 1 April 2009 to 31 March 2015 Final Salary 1/60th pensionable pay each year n/a Prior to 1 April 2009 Final Salary 1/80th pensionable pay each year 3/80th final pensionable salary and years of pensionable service The value of accrued benefits has been calculated on the basis of the age at which the person will become first entitled to receive a pension on retirement without reduction on account of its payment at that age, without exercising any option to commute pension entitlement into a lump sum, and without any adjustment for the effects of future inflation. The pension entitlements for Senior Councillors for the year to 31 March 2024 are shown in the tables below, together with the contribution made by the Council to each Senior Councillor’s pension during the year. Page 108 of 268
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Remuneration Report Senior Councillors In-Year Pension Contributions Councillor Name and Responsibility Year to 31 Mar 2024 Year to 31 Mar 2023 Senior Councillor (Apr 23-Mar 24) K Parry: Council Leader £7,438 £6,822 D McCall: Provost £5,578 £5,274 D Virgo: Group Leader £5,020 £4,368 D Alexander: Cabinet Member £0 £631 C McManus: Cabinet Member (1) £5,036 n/a E Scott: Cabinet Member £5,020 £4,388 S McKenzie: Cabinet Member £5,020 £4,809 R Imrie: Chair of Planning Committee £3,347 £4,883 C Cassidy: Depute Leader and Group Leader £5,020 £4,915 Total £41,479 £36,090 Notes: 1. On 21 Mar 2023 D Bowen resigned as Cabinet Member and assumed the role of Depute Provost, the vacant Cabinet post was subsequently filled by C McManus. Senior Councillors Accrued Pension Benefits Pension at 31 March 2024 Lump Sum at 31 March 2024 Pension Difference from 31 March 2023 Lump Sum Difference from 31 March 2023 Senior Councillor £000 £000 £000 £000 K Parry 4 0 0 0 D McCall 3 0 0 0 D Virgo 1 0 1 0 C McManus (2) 0 0 0 0 E Scott (2) 0 0 0 0 S McKenzie 1 0 0 0 R Imrie (1) 8 2 1 0 C Cassidy 3 0 0 0 Total 20 2 2 0 1. Member still active in post but out of the scheme due to scheme regulations, CARE pay used to calculate employer contributions £15,076; 2. Member has less than 2 years’ service so there is no pension liability. The pension entitlements for Senior Employees for the year to 31 March 2024 are shown in the tables below, together with the contribution made by the Council to each Senior Employees (as defined in the regulations) pension during the year. Senior Employees In-Year Pension Contributions Senior Employee Name and Responsibility Year to 31 March 2024 Year to 31 March 2023 Full Year (Apr 23-Mar 24) G Vickers: Chief Executive £29,556 £28,537 M Barrow: Joint Director: Health and Social Care £0 £3,097 K Anderson: Executive Director: Place £25,830 £24,357 F Robertson: Executive Director: Children, Young People and Communities £25,830 £24,357 J Tranent: Chief Officer: Children’s Services, Partnerships and Communities (Chief Social Work Officer) £21,834 £20,588 D Gladwin: Chief Financial Officer (S95 Officer) £21,210 £18,188 A Turpie: Legal Services Manager (Monitoring Officer) £17,019 £15,609 Total £141,279 £134,733 Page 109 of 268
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Remuneration Report Senior Employees Accrued Pension Benefits Pension at 31 March 2024 Lump Sum at 31 March 2024 Pension Difference from 31 March 2023 Lump Sum Difference from 31 March 2023 Senior Employee £000 £000 £000 £000 G Vickers 22 0 3 0 K Anderson 70 115 5 6 F Robertson 16 0 3 0 D Gladwin 44 59 6 8 J Tranent 43 48 5 5 A Turpie 42 64 4 6 Total 237 286 26 25 All senior employees (as defined in the regulations) shown in the tables above except M Barrow are members of the Local Government Pension Scheme. M Barrow is employed by NHS Lothian and was a member of the NHS pension scheme. The pension figures shown relate to the benefits accrued as a consequence of total local government service, not solely on the current appointment. Remuneration of Other Employees by Pay Bands The Regulations require the Remuneration Report to provide information on the number of persons whose remuneration was £50,000 or above, this information is detailed in bands of £5,000 in the table below: Total Employees Non-Teaching Employees Teaching Employees Total Employees 2022/23 Remuneration Band 2023/24 2023/24 2023/24 79 £50,000-£54,999 27 53 80 92 £55,000-£59,999 21 86 107 46 £60,000-£64,999 23 40 63 20 £65,000-£69,999 4 56 60 11 £70,000-£74,999 12 35 47 4 £75,000-£79,999 4 16 20 2 £80,000-£84,999 0 5 5 3 £85,000-£89,999 2 2 4 4 £90,000-£94,999 0 2 2 2 £95,000-£99,999 6 1 7 2 £105,000-£109,999 0 0 0 0 £110,000-£114,999 0 2 2 0 £115,000-£119,999 2 0 2 1 £130,000-£134,999 1 0 1 266 Total 102 298 400 Exit Packages Termination benefits are amounts payable because of a decision by the Council to terminate an officer’s employment before the normal retirement date or an officer’s decision to accept voluntary redundancy. They are charged on an accruals basis to Services in the Comprehensive Income and Expenditure Statement when the Council is demonstrably committed to either terminating the employment of an officer or making an offer to encourage voluntary redundancy. The Council is only demonstrably committed to a termination when it has a detailed formal plan for the termination and it is without realistic possibility of withdrawal. Where termination benefits involve the enhancement of pensions, statutory provisions require the General Fund balance to be charged with the amount payable by the Council to the pension fund or pensioner in the year, not the amount calculated according to the relevant accounting standards. In the Movement in Page 110 of 268
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Remuneration Report Reserves Statement, appropriations are required to and from the Pensions Reserve to remove the notional debits and credits for pension enhancement termination benefits and to replace them with debits for the cash paid to the pension fund and the pensioners and any such amounts payable but unpaid at the year- end. The cost incurred by the Council for voluntary redundancy packages in 2023/24 was £0 (2022/23 £0). Trade Union Facility Time The Council is now required to publish details of Trade Union facility time incurred during the year. Further information is published on the Council’s website: Trade union facility time | Midlothian Council For the reporting year 2023/24, the equivalent of 5.6 FTE employees (across fourteen individuals) of paid time facility was made available. The proportion of their working hours spent on facility time is as follows: Percentage of Time Number of Employees 1% - 50% 12 51% - 99% 1 100% 1 The percentage of the total pay bill spent on facility time (calculated as total cost of facility time ÷ total pay bill) is: Total cost of facility time £237,087 Total Pay Bill £193,444,518 Percentage total 0.12% Time spend on paid Trade Union activities as a percentage of total paid facility time: 10,519 hours = 100%. ___________________________ ___________________________ Councillor Kelly Parry Dr Grace Vickers Leader of the Council Chief Executive Page 111 of 268
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Independent Auditor’s Report Independent Auditor’s Report Independent Auditors Report to the members of Midlothian Council and the Accounts Commission Under arrangements approved by the Commission for Local Authority Accounts in Scotland, the auditor with responsibility for the audit of the annual accounts of Midlothian Council for the year-end 31 March 2024 is: Claire Gardiner Audit Director Audit Scotland 4th Floor 102 West Port Edinburgh EH3 9DN The certified Annual Accounts will be presented to Audit Committee for approval on completion of the audit. Page 112 of 268
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Expenditure and Funding Analysis Expenditure and Funding Analysis The Expenditure and Funding Analysis shows how annual expenditure is used and funded from resources (government grants, rents, council tax and business rates) by the Council in comparison with those resources consumed or earned by the Council in accordance with generally accepted accounting practices. It also shows how this expenditure is allocated for decision making purposes between the Council’s services. Income and expenditure accounted for under generally accepted accounting practices are presented more fully in the Comprehensive Income and Expenditure Statement. 2022/23 2023/24 Net expenditure chargeable to the General Fund and HRA Balances Adjustments (see Note 6) Net expenditure in the CIES Net expenditure chargeable to the General Fund and HRA Balances Adjustments (see Note 6) Net expenditure in the CIES £000 £000 £000 £000 £000 £000 1,968 130 2,098 Management & Members 1,884 (6) 1,878 18,025 741 18,766 Children’s Services, Partnerships & Communities 18,610 101 18,711 110,003 29,648 139,651 Education 119,986 23,280 143,266 (4,821) 792 (4,029) Adult Health & Social Care – Non-Delegated 615 566 1,181 56,612 3,572 60,184 Midlothian Integrated Joint Board 57,416 2,827 60,243 35,756 14,793 50,549 Place 41,793 14,448 56,241 18,411 (2,002) 16,409 Corporate Solutions 16,804 (4,367) 12,437 (15,957) 30,270 14,313 Housing Revenue Account (14,717) 55,597 40,880 565 0 565 Joint Boards 562 0 562 210 84 294 Central Costs 313 74 387 773 (11) 762 Non-distributable Costs 808 (23) 785 221,545 78,017 299,562 Net Cost of Services 244,074 92,497 336,571 (228,555) (35,031) (263,586) Other Income & Expenditure (236,000) (53,655) (289,655) (7,010) 42,986 35,976 (Surplus) or deficit 8,074 38,842 46,916 (60,516) Opening General Fund & HRA Balance (87,569) (7,010) Less/plus (Surplus) or Deficit on General Fund & HRA balance in Year 8,074 420 Transfers to/from Other Statutory Reserves (25) (67,106) Closing General Fund and HRA Balance at 31 March* (79,520) * For a split of this balance between the General Fund and HRA – see the Movement in Reserves Statement. Page 113 of 268
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Principal Financial Statements Principal Financial Statements The annual accounts summarise the Council’s transactions for the year, its year-end position at 31 March 2024 and its cash flows. The annual accounts are prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom 2023/24 (the Code), which is based on International Financial Reporting Standards (IFRSs). Every effort has been made to use plain language; where technical terms are unavoidable, they have been explained in the Glossary. The four principal statements and their relationships are explained in more detail below: • Comprehensive Income and Expenditure Statement – this shows the accounting cost in the year of providing services in accordance with generally accepted accounting practices, rather than the amount to be funded from taxation (or rents). Councils raise taxation (and rents) to cover expenditure in accordance with statutory requirements; this may be different from the accounting cost. The taxation position is shown in both the Expenditure and Funding Analysis and the Movement in Reserves Statement. • Movement in Reserves Statement – this shows the movement from the start of the year to the end on the different reserves held by the Council, analysed into ‘usable reserves’ (i.e. those that can be applied to fund expenditure or reduce local taxation) and other ‘unusable reserves.’ The statement shows how the movements in the year of the Council’s reserves are broken down between gains and losses incurred in accordance with generally accepted accounting practices and the statutory adjustments required to return to the amounts chargeable to council tax (or rents) for the year. The net increase/decrease line shows the statutory General Fund balance and Housing Revenue Account (HRA) balance movements in the year following those adjustments. • Balance Sheet – this shows the value as at the Balance Sheet date of the assets and liabilities recognised by the Council. The net assets of the Council (assets less liabilities) are matched by the reserves held by the Council. Reserves are reported in two categories. The first category of reserves are usable reserves, i.e. those reserves that the authority may use to provide services, subject to the need to maintain a prudent level of reserves and any statutory limitations on their use. The second category of reserves is those that the Council is not able to use to provide services. This category of reserves includes reserves that hold unrealised gains and losses (for example the revaluation reserve), where amounts would only become available to provide services if the assets are sold; and reserves that hold timing differences shown in the Movement in Reserves Statement line ‘adjustments between accounting basis and funding basis under regulations.’ • Cash Flow Statement – this shows the changes in cash and cash equivalents of the Council during the reporting period. The statement shows how the Council generates and uses cash and cash equivalents by classifying cash flows as operating, investing and financing activities. The amount of net cash flows arising from operating activities is a key indicator of the extent to which the operations of the Council are funded by way of taxation and grant income or from the recipients of the services provided by the Council. Investing activities represent the extent to which cash outflows have been made for resources which are intended to contribute to the Council’s future service delivery. Cash flows arising from financing activities are useful in predicting claims on future cash flows by providers of capital (i.e. borrowing) to the Council. Page 114 of 268
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Principal Financial Statements Group and Council Comprehensive Income and Expenditure Statement 2022/23 2023/24 Gross Expenditure Gross Income Net Expenditure or (Income) Group Net Expenditure Gross Expenditure Gross Income Net Expenditu re or (Income) Group Net Expenditure £000 £000 £000 £000 Service £000 £000 £000 £000 Notes 2,121 (23) 2,098 2,098 Management and Members 1,878 0 1,878 1,878 EFA 22,014 (3,248) 18,766 18,766 Children’s Services, Partnerships and Communities 20,490 (1,779) 18,711 18,711 EFA 159,645 (19,994) 139,651 139,651 Education 163,851 (20,585) 143,266 143,266 EFA 7,464 (11,493) (4,029) (4,029) Adult Health and Social Care – Non-Delegated 1,598 (417) 1,181 1,181 EFA 140,264 (80,080) 60,184 60,184 Midlothian Integration Joint Board 150,812 (90,569) 60,243 60,243 EFA 85,697 (35,148) 50,549 50,549 Place 106,713 (50,472) 56,241 56,241 EFA 41,707 (25,298) 16,409 16,409 Corporate Solutions 36,415 (23,978) 12,437 12,437 EFA 45,176 (30,863) 14,313 14,313 Housing Revenue Account 72,840 (31,960) 40,880 40,880 EFA 565 0 565 565 Lothian Valuation Joint Board 562 0 562 562 EFA 294 0 294 294 Central Costs 387 0 387 387 EFA 762 0 762 689 Non-Distributable Costs 785 0 785 782 EFA 505,709 (206,147) 299,562 299,489 Cost of Services 556,331 (219,760) 336,571 336,568 0 5,738 Associates and Joint Ventures accounted for on an Equity Basis 0 6,244 38 338 338 Other Operating (Income) or Expenditure (70) (70) 9 12,568 12,568 Financing and Investment Income and Expenditure 31 31 10 (276,492) (276,492) Taxation and Non-specific Grant Income and Expenditure (289,616) (289,616) 11 35,976 41,641 (Surplus) or Deficit on Provision of Services 46,916 53,157 13 (63,840) (63,840) Surplus or Deficit on Revaluation of Property, Plant and Equipment Assets (15,560) (15,560) (1,117) (1,117) Surplus or deficit on Financial Assets Measured at Fair Value through Other Comprehensive Income 165 165 (66,774) (66,774) Remeasurement of the Net Defined Benefit Liability/(Asset) 11,373 11,373 1,911 465 Other (Gains)/Losses 2,705 4,198 (129,820) (131,266) Other Comprehensive (Income) and Expenditure (1,317) 176 (93,844) (89,625) Total Comprehensive (Income) and Expenditure 45,599 53,333 Page 115 of 268
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Principal Financial Statements Group and Council Movement In Reserves Statement General Fund Housing Revenue Account Capital Fund Repairs & Renewals Fund Total Usable Reserves Unusable Reserves Total Council Reserves Councils Share of Reserves of Associates, Subsidiaries & Joint Ventures Total Group Reserves Current Year £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 31 March 2023 (34,963) (32,143) (20,107) (4,138) (91,351) (748,933) (840,284) (6,948) (847,232) Opening Balance Adjustment – Service concessions (20,463) 0 0 0 (20,463) 20,463 0 124 124 Revised Balance 31 March 2023 (55,426) (32,143) (20,107) (4,138) (111,814) (728,470) (840,284) (6,824) (847,108) Movement in Reserves during 2023/24 Total comprehensive income and expenditure (1,295) 48,211 2,865 0 49,781 (4,182) 45,599 7,734 53,333 Adjustments between accounting basis and funding basis under regulations (Note 7) 15,087 (51,321) 0 0 (36,234) 36,234 0 0 0 Adjustment to the statutory repayment of debt for service concession arrangements - permitted flexibility (2,608) 0 0 0 (2,608) 2,608 0 0 0 Transfers to/(from) other statutory reserves (2,096) 2,071 0 25 0 0 0 0 0 (Increase)/Decrease in Year 9,088 (1,039) 2,865 25 10,939 34,660 45,599 7,734 53,333 Balance at 31 March 2024 Carried Forward (46,338) (33,182) (17,242) (4,113) (100,875) (693,810) (794,685) 910 (793,775) Comparative Year £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 31 March 2022 (32,432) (28,084) (22,178) (3,718) (86,412) (660,028) (746,440) (11,203) (757,643) Movement between Group Unaudited and Audited Accounts 0 0 0 0 0 0 0 36 36 Revised Balance 31 March 2022 (32,432) (28,084) (22,178) (3,718) (86,412) (660,028) (746,440) (11,167) (757,607) Movement in Reserves during 2022/23 Total comprehensive income and expenditure 15,518 20,458 2,071 0 38,047 (131,891) (93,844) 4,219 (89,625) Adjustments between accounting basis and funding basis under regulations (Note 7) (16,400) (26,586) 0 0 (42,986) 42,986 0 0 0 Transfers to/(from) other statutory reserves (1,649) 2,069 0 (420) 0 0 0 0 0 (Increase)/Decrease in Year (2,531) (4,059) 2,071 (420) (4,939) (88,905) (93,844) 4,219 (89,625) Balance at 31 March 2023 Carried Forward (34,963) (32,143) (20,107) (4,138) (91,351) (748,933) (840,284) (6,948) (847,232) Page 116 of 268
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Principal Financial Statements Group and Council Balance Sheet 31 Mar 23 31 Mar 23 31 Mar 24 31 Mar 24 Midlothian Council Group Midlothian Council Group £000 £000 £000 £000 Notes 1,155,972 1,155,972 Property, Plant and Equipment 1,170,980 1,170,980 14 34,819 34,819 Infrastructure Assets 38,423 38,423 15 458 458 Heritage Assets 456 456 16 202 202 Intangible Assets 104 104 17 4,190 4,137 Long-term Debtors 4,171 4,113 18/19 11,693 6,082 Long-term Investments 11,526 5,916 19 0 12,450 Share of net assets of associates & joint ventures 0 4,589 38 1,207,334 1,214,120 Long-term Assets 1,225,660 1,224,581 20,122 20,122 Short-term Deposits 30,017 30,017 19 1,080 1,080 Assets Held for Sale 1,690 1,690 21 1,023 1,023 Inventories 972 972 22 40,811 40,861 Short-term Debtors 38,114 38,175 19/23 95,654 95,654 Cash and Cash Equivalents 27,505 27,505 24 158,690 158,740 Current Assets 98,298 98,359 (3,195) (3,195) Short-term Borrowing (3,797) (3,797) 19 (58,546) (58,434) Short-term Creditors (50,960) (50,852) 19/25 (1,239) (1,239) Provisions (1,294) (1,294) 26 (44,731) (44,731) Grants Received in Advance (40,821) (40,821) 27 (107,711) (107,599) Current Liabilities (96,872) (96,764) (321,490) (321,490) Long-term Borrowing (339,971) (339,971) 19 Other Long-term Liabilities (88,739) (88,739) • PPP Contracts (84,818) (84,818) 19/33 (7,800) (7,800) • Pension Liability (7,612) (7,612) 34/35 (418,029) (418,029) Long-term Liabilities (432,401) (432,401) 840,284 847,232 Net Assets 794,685 793,775 91,351 98,293 Usable Reserves 100,875 100,079 28 748,933 748,939 Unusable Reserves 693,810 693,696 29 840,284 847,232 Total Reserves 794,685 793,775 The unaudited accounts were authorised for issue on 26 June 2024 and the audited accounts were authorised for issue on 25 November 2023. I certify that the Balance Sheet presents a true and fair view of the financial position of the Council and its Group at 31 March 2024, and its income and expenditure for the year ended 31 March 2024. _____________________ David Gladwin Chief Financial Officer Page 117 of 268
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Principal Financial Statements Group and Council Cash Flow Statement 2022/23 2022/23 2023/24 2023/24 Midlothian Council Group Midlothian Council Group £000 £000 £000 £000 (35,976) (41,641) Net surplus/(deficit) on the provision of services (46,916) (53,157) Operating Activities Adjustments to the surplus or deficit on the provision of services for non-cash movements 41,639 41,639 Depreciation 50,206 50,206 17,379 17,379 Impairment and downward valuations 44,230 44,230 171 171 Amortisation 124 124 (7,811) (7,758) (Increase)/decrease in debtors 2,223 2,285 2,372 2,261 Increase/(decrease) in creditors (10,416) (10,524) (40) (40) (Increase)/decrease in inventories 51 51 20,414 20,414 Movement in pension liability (11,561) (11,561) 1,158 1,158 Carrying amounts of non-current assets sold or de-recognised 179 179 (2,071) 3,652 Other non-cash items charged to the net surplus or deficit on the provision of services 55 6,342 73,211 78,876 Total non-cash movements 75,091 81,332 Adjustments to the surplus or deficit on the provision of services for investing and financing activities 225,900 225,900 Proceeds from short- and long-term deposits 132,000 132,000 (991) (991) Proceeds from sale of property, plant, equipment and intangible assets (249) (249) (27,824) (27,824) Any other items for which the cash effects are investing or financing cash flows (33,554) (33,554) 197,085 197,085 Total investing and financing activities 98,197 98,197 270,296 275,961 Net Cash Flows from Operating Activities 173,288 179,529 Investing Activities (72,229) (72,229) Purchase of property, plant, equipment and intangible assets (95,601) (95,601) (205,015) (205,015) Purchase of short- and long-term deposits (142,000) (142,000) 0 0 Other payments for investing activities 0 0 991 991 Proceeds from sale of property, plant, equipment and intangible assets 249 249 32,455 32,455 Other receipts from investing activities 27,322 27,322 (243,798) (243,798) Net Cash Flows from Investing Activities (210,030) (210,030) Financing Activities 0 0 Cash receipts from short- and long-term borrowing 20,000 20,000 (3,484) (3,484) Cash payments for the reduction of the outstanding liabilities relating to on balance sheet PPP contracts (3,769) (3,769) 159 159 Other receipts from financing activities 160 160 (1,518) (1,518) Repayments of short- and long-term borrowing (882) (882) (4,843) (4,843) Net Cash Flows from Financing Activities 15,509 15,509 (14,321) (14,321) Net Increase/(Decrease) in Cash and Cash Equivalents (68,149) (68,149) 109,975 109,975 Cash and Cash Equivalents at 1 April 95,654 95,654 95,654 95,654 Cash and Cash Equivalents at 31 March (Note 24) 27,505 27,505 The cash flow for operating activities include the following items £000 £000 Interest Paid and Received £000 £000 3,161 3,161 Interest Received 4,415 4,415 (15,269) (15,269) Interest Paid (16,244) (16,244) 0 0 Dividend Received 175 175 Page 118 of 268
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Notes to the Accounts Notes to the Accounts The notes to the accounts provide further information about the basis of preparation of the Annual Accounts, the specific accounting policies used and where the materiality is such that further disclosure is merited. The Council’s Annual Accounts for 2023/24 have been prepared on a going concern basis. The concept of a going concern assumes that the Council’s functions and services will continue in operational existence for the foreseeable future. The provisions in respect of going concern reporting requirements reflect the economic and statutory environment in which local authorities operate. The provisions confirm that, as authorities cannot be created or dissolved without statutory prescription, they must prepare their annual accounts on a going concern basis of accounting. In accordance with the CIPFA Code of Local Government Accounting (2023/24), the Council is required to prepare its annual accounts on a going concern basis unless informed by the relevant national body of the intention for dissolution without transfer of services or function to another entity. The accounts are prepared on the assumption that the Council will continue in operational existence for the foreseeable future. 1. Accounting Policies i. General principles The statement of accounts summarise the Council’s transactions for the 2023/24 financial year and its position for the year-end of 31 March 2024. The Council is required to prepare an annual statement of accounts by the Local Authority Accounts (Scotland) Regulations 2014, which Section 12 of the Local Government Scotland Act 2003 require to be prepared in accordance with proper accounting practices. These practices under Section 21 of the 2003 Act primarily comprise the Code of Practice on Local Authority Accounting in the United Kingdom 2023/24, supported by International Financial Reporting Standards (IFRS) and the statutory guidance issued under section 12 of the 2003 Act. The accounting convention adopted in the statement of accounts is principally historical cost, modified by the revaluation of certain categories of non-current assets and financial instruments. ii. Accruals of income and expenditure Activity is accounted for in the year that it takes place, not simply when cash payments are made or received. In particular: • Revenue from contracts with service recipients, whether for services or the provision of goods, is recognised when (or as) the goods or services are transferred to the service recipient in accordance with the performance obligations of the contract. • Supplies are recorded as expenditure when they are consumed – where these is a gap between the date supplies are received and their consumption, they are carried as inventories on the Balance Sheet. • Expenses in relation to services received (including services provided by employees) are recorded as expenditure when the services are received rather than when payments are made. • Interest receivable on deposits and payable on borrowings is accounted for respectively as income and expenditure on the basis of the effective interest rate for the relevant financial instrument rather than the cash flows fixed or determined by the contract. Page 119 of 268
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Notes to the Accounts • Where revenue and expenditure have been recognised but cash has not been received or paid, a debtor or creditor for the relevant amount is recorded in the Balance Sheet. Where debts may not be settled, the balance of debtors is written down and a charge made to revenue for the income that might not be collected. iii. Cash and cash equivalents Cash is represented by cash in hand and deposits with financial institutions repayable without penalty on notice of not more than 24 hours. Cash equivalents are highly liquid deposits that mature in no more than three months or less from the date of acquisition and that are readily convertible to known amounts of cash with insignificant risk of change in value. In the Cash Flow Statement, cash and cash equivalents are shown net of bank overdrafts that are repayable on demand and form an integral part of the Council’s cash management. iv. Prior period adjustments, changes in accounting policies, estimates and errors Prior period adjustments may arise as a result of a change in accounting policies or to correct a material error. Changes in accounting estimates are accounted for prospectively, i.e. in the current and future years affected by the change and do not give rise to a prior year adjustment. Changes in accounting policies are only made when required by proper accounting practices or the change provides more reliable or relevant information about the effect of transactions, other events and conditions on the Council’s financial position or financial performance. Where a change is made, it is applied retrospectively (unless stated otherwise) by adjusting opening balances and comparative amounts for the prior period as if the new policy had always been applied. Material errors discovered in prior period figures are corrected retrospectively by amending opening balances and comparative amounts for the prior period. v. Charges to revenue for non-current assets Services and support services are charged an accounting estimate of the cost of holding non-current assets during the year. This comprises: • Depreciation attributable to the assets used by the relevant service; • Revaluation and impairment losses on assets used by the service where there are no accumulated gains in the revaluation reserve against which the losses can be written off; • Amortisation of intangible assets attributable to the service. The Council is not required to raise council tax to fund depreciation, revaluation and impairment losses or amortisation. However, it is required to make an annual contribution from revenue towards the reduction in its overall borrowing requirement, equal to an amount calculated on a prudent basis determined by the Council in accordance with the statutory Repayment of Loans Fund Advances. This is known as the Loans Fund Principal Repayment. Depreciation, revaluation and impairment losses, and amortisation are therefore replaced by the Loans Fund Principal Repayments in the General Fund balance by way of an adjusting transaction with the Capital Adjustment Account in the Movement in Reserves Statement for the difference between the two. Page 120 of 268
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Notes to the Accounts vi. Employee Benefits Benefits payable during employment Short-term employee benefits are those due to be settled wholly within 12 months of the year-end. They include such benefits as wages and salaries, paid annual leave, paid sick leave and overtime for current employees. They are recognised as an expense for services in the year in which employees render service to the Council. An accrual is made for the cost of holiday entitlements earned by employees but not taken before the year-end that employees can carry forward into the next financial year. The accrual is made at the wages and salary rates applicable in the following accounting year. The accrual is charged to surplus or deficit on the provision of services, but then reversed out through the Movement in Reserves Statement to the accumulated absences account so that holiday entitlements are charged to revenue in the financial year in which the holiday absence occurs. Termination benefits Termination benefits are amounts payable as a result of a decision by the Council to terminate an officer’s employment before normal retirement date or an officer’s decision to accept voluntary redundancy in exchange for those benefits and are charged on an accruals basis to the appropriate service segment when the Council is demonstrably committed to the termination of the employment of an officer or group of officers or making an offer to encourage voluntary severance. Where termination benefits involve the enhancement of pensions, statutory provisions require the General Fund balance to be charged with the amount payable by the Council to the pension fund or pensioner in the year, not the amount calculated according to the relevant accounting standards. In the Movement in Reserves Statement, appropriations are required to and from the pensions reserve to remove the notional debits and credits for pension enhancement termination benefits and replace them with debits for the cash paid to the pension fund and pensioners and any such amounts payable but unpaid at the year-end. Post-employment benefits Employees of the Council are members of two separate pension schemes: • The Teachers’ pension scheme, administered by the Scottish Government; • The Local Government Pensions Scheme, administered by the City of Edinburgh Council on behalf of Lothian Pension Fund. Both schemes provide defined benefits to members (retirement lump sums and pensions), earned as employees worked for the Council. However, the arrangements for the teachers’ scheme mean that liabilities for these benefits cannot ordinarily be identified specifically to the Council. The scheme is therefore accounted for as if it were a defined contribution scheme and no liability for future payments of benefits is recognised in the Balance Sheet. The education services line in the Comprehensive Income and Expenditure Statement is charged with the employer’s contributions payable to the Teachers’ Pensions in the year. The Local Government Pension Scheme The Local Government Pension Scheme is accounted for as a defined benefits scheme: • The liabilities of the Lothian Pension Fund attributable to the Council are included in the Balance Sheet on an actuarial basis using the projected unit method – i.e. an assessment of the future payments that will be made in relation to retirement benefits earned to date by employees, based Page 121 of 268
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Notes to the Accounts on assumptions about mortality rates, employee turnover rates, etc. and projected earnings for current employees. • Liabilities are discounted to their value at current prices, using a discount rate as advised by the actuary, Hymans Roberson LLP. • The assets of Lothian Pension Fund attributable to the Council are included in the Balance Sheet at their fair value: o Quoted securities – current bid price; o Unquoted securities – professional estimate; o Unitised securities – current bid price; o Property – market value. The change in the net pension’s liability is analysed into the following components: Service cost comprising: • Current service cost – the increase in liabilities as a result of years of service earned this year – allocated in the Comprehensive Income and Expenditure Statement to the services for which the employees worked; • Past service cost – the increase in liabilities as a result of a scheme amendment or curtailment whose effect relates to years of service earned in earlier years – debited to the surplus or deficit on the provision of services in the Comprehensive Income and Expenditure Statement as part of Non- Distributed Costs; • Net interest on the net defined liability (asset), i.e. net interest expense for the Council – the change during the period in the net defined liability (asset) that arises from the passage of time charged to the financing and investment income and expenditure line of the Comprehensive Income and Expenditure Statement – this is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the period to the net defined benefit liability (asset) at the beginning of the period, taking into account any changes in the net defined benefit liability (asset) during the period as a result of contribution and benefit payments. Re-measurements comprising: • The return on plan assets – excluding amounts included in net interest on the net defined benefit liability (asset) – charged to the pensions reserve as other comprehensive income and expenditure; • Actuarial gains and losses – changes in the net pensions liability that arise because events have not coincided with assumptions made at the last actuarial valuation or because the actuaries have updated their assumptions – charged to the pensions reserve as other comprehensive income and expenditure; • Contributions paid to the Lothian Pension Fund – cash paid as employer’s contributions to the pension fund in settlement of liabilities; not accounted for as an expense. In relation to retirement benefits, statutory provisions require the General Fund balance to be charged with the amount payable by the Council to the pension fund or directly to pensioners in the year, not the amount calculated according to the relevant accounting standards. In the Movement in Reserves Statement, this means that there are transfers to and from the pensions reserve to remove the notional debits and credits for retirement benefits and replace them with debits for the cash paid to the pension fund and pensioners and any such amounts payable but unpaid at the year-end. The negative balance that arises on the pensions reserve thereby measures the beneficial impact to the General Fund of being Page 122 of 268
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Notes to the Accounts required to account for retirement benefits on the basis of cash flows rather than as benefits earned by employees. Pension Net Asset Restriction Calculation The actuary has calculated the Council’s IAS 19 defined benefit surplus for 2023/24 to be £185.529 million as detailed in Note 35 to the accounts. IAS 19 states that when an entity has a surplus in the defined benefit plan it should measure the net defined benefit of the asset as the lower of: • The surplus in the defined benefit plan, and • The asset ceiling, which the actuary has calculated as the present value of any economic benefits available in the form of reductions in future contributions to the plan. For IFRIC 14 purposes, the actuary has calculated the net present value of the future contributions which exceeds the value of the future service costs resulting in a negative contribution. As a result of this calculation IFRIC 14 advises that no defined benefit plan asset should be recognised on the Council’s Balance Sheet and there is no requirement to recognise the difference as a liability, however, is required to reflect the liability in relation to present value of any unfunded obligations. Discretionary benefits The Council also has restricted powers to make discretionary awards of retirement benefits in the event of early retirements. Any liabilities estimated to arise as a result of an award to any member of staff (including teachers) are accrued in the year of the decision to make the award and accounted for using the same policies as are applied to the Local Government Pension Scheme. vii. Events after the reporting period Events after the Balance Sheet reporting period are those events, both favourable and unfavourable, that occur between the Balance Sheet date and the date when the statement of accounts is authorised for issue. Two types of events can be identified: • Those that provide evidence of conditions that existed at the end of the reporting period – the statement of accounts is adjusted to reflect such events; • Those that are indicative of conditions that arose after the reporting period – the statement of accounts is not adjusted to reflect such events, but where such a category of events would have a material effect, disclosure is made in the notes of the nature of the events and their estimated financial effect. Events taking place after the date of authorisation for issue are not reflected in the statement of accounts. viii. Financial instruments Financial Liabilities Financial liabilities are recognised on the Balance Sheet when the Council becomes a party to the contractual provisions of a financial instrument and are initially measured at fair value and are carried at their amortised cost. Annual charges to the financing and investment income and expenditure line in the Comprehensive Income and Expenditure Statement (CIES) for interest payable are based on the carrying amount of the liability, multiplied by the effective rate of interest for the instrument. The effective interest rate is the rate that exactly discounts estimated future cash payments over the life of the instrument to the amount at which it was originally recognised. Page 123 of 268
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Notes to the Accounts For most of the borrowings that the Council has, this means that the amount presented in the Balance Sheet is the outstanding principal repayable (plus accrued interest); and interest charged to the CIES is the amount payable for the year according to the loan agreement. Where premiums and discounts have been charged to the CIES, regulations allow the impact on the General Fund or Housing Revenue Account balances to be spread over future years. The Council has a policy of spreading the gain or loss over the term that was remaining on the loan against which the premium was payable or discount receivable when it was repaid. The reconciliation of amounts charged to the CIES to the net charge required against the General Fund balance is managed by a transfer to or from the financial instruments adjustment account in the Movement in Reserves Statement. Financial Assets Financial assets are classified based on a classification and measurement approach that reflects the business model for holding the financial assets and their cash flow characteristics. The Council holds financial assets measured at: • Amortised cost; and • Fair value through other comprehensive income (FVOCI). The Council’s business model is to hold investments to collect contractual cash flows. Financial assets are therefore classified as amortised cost, except for those whose contractual payments are not solely payment of principal and interest (i.e. where the cash flows do not take the form of a basic debt instrument). Financial Assets Measured at Amortised Cost Financial assets measured at amortised cost are recognised on the Balance Sheet when the Council becomes party to the contractual provisions of a financial instrument and are initially measured at fair value. They are subsequently measured at their amortised cost. Annual credits to the financing and investment income and expenditure line in the CIES for interest receivable are based on the carrying amount of the asset multiplied by the effective rate of interest for the instrument. For most of the financial assets held by the Council, this means that the amount presented in the Balance Sheet is the outstanding principal receivable (plus accrued interest), and interest credited to the CIES is the amount receivable for the year in the loan agreement. Any gains and losses that arise on de-recognition of a financial asset are credited or debited to the financing and investment income and expenditure line in the CIES. Expected Credit Loss Model The Council recognises expected credit losses on all of its financial assets held at amortised cost (or where relevant FVOCI), either on a 12-month or lifetime basis. The expected credit loss model also applies to lease receivables and contract assets. Only lifetime losses are recognised for trade receivables (debtors) held by the Council. Impairment losses are calculated to reflect the expectation that the future cash flows might not take place because the borrower could default on their obligations. Credit risk plays a crucial part in assessing losses. Where risk has increased significantly since an instrument was initially recognised, losses are assessed on a lifetime basis. Where risk has not increased significantly or remains low, losses are assessed on the basis of 12-month expected losses. Financial Assets Measured at Fair Value through Other Comprehensive Income (FVOCI) Page 124 of 268
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Notes to the Accounts Financial assets that are measured at FVOCI are recognised on the Balance Sheet when the Council becomes a party to the contractual provisions of a financial instrument and are initially measured and carried at fair value. Fair value gains and losses are recognised as they arise in other comprehensive income. Fair Value Measurement of Financial Assets Fair value of an asset is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. The fair value measurements of the Council’s financial assets are based on the following techniques: • Instruments with quoted market prices – the market price; • Other instruments with fixed determinable payments – discounted cash flow analysis. The inputs to the measurement techniques are categorised in accordance with the following three levels: • Level 1 inputs – quoted prices (unadjusted) in active markets for identical assets that the Council can access at the measurement date; • Level 2 inputs – inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly; • Level 3 inputs – unobservable inputs for the asset. Any gains and losses that arise on de-recognition of the asset are credited or debited to the financing and investment income and expenditure line in the Comprehensive Income and Expenditure Statement. The Council designates that investments held for strategic purposes be classified as being measured as FVOCI. Any gains and losses on these investments will be held in the Financial Instruments Revaluation Reserve. Where assets are identified as impaired because of a likelihood arising from a past event that payments due under the contract will not be made (fixed or determinable payments) or fair value falls below cost, the asset it written down and a charge made to the Financing and Investment Income and Expenditure line in the CIES. If the asset has fixed or determinable payments, the impairment loss is measured as the difference between the carrying amount and the present value of the revised future cash flows discounted at the asset’s original effective interest rate. Otherwise the impairment loss is measured as any shortfall of fair value against the acquisition cost of the instrument (net of any principal repayment and amortisation). ix. Government grants and contributions Whether paid on account, by instalments or in arrears, government grants and third party contributions and donations are recognised as due to the Council when there is reasonable assurance that: • The Council will comply with the conditions attached to the payments; and • The grants or contributions will be received. Amounts recognised as due to the Council are not credited to the Comprehensive Income and Expenditure Statement until conditions attached to the grant or contribution have been satisfied. Conditions are stipulations that specify that the future economic benefits or service potential embodied in the asset in the form of the grant or contribution are required to be consumed by the recipient as specified, or future economic benefits or service potential must be returned to the transferor. Monies advanced as grants and contributions for which conditions have not been satisfied are carried in the Balance Sheet as creditors. When conditions are satisfied, the grant or contribution is credited to the relevant service line (attributable revenue grants and contributions) or taxation and non-specific grant Page 125 of 268
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Notes to the Accounts income and expenditure (non-ring-fenced revenue grants and all capital grants) in the Comprehensive Income and Expenditure Statement. Where capital grants are credited to the Comprehensive Income and Expenditure Statement, they are reversed out of the General Fund Balance in the Movement in Reserves Statement. Where the grant has yet to be used to finance capital expenditure, it is posted to the capital grants received in advance. Where it has been applied, it is posted to the Capital Adjustment Account once they have been applied to fund capital expenditure. x. Heritage assets A heritage asset is defined as a tangible asset with historical, artistic, scientific, technological, geophysical or environmental qualities that is held and maintained principally for its contribution to knowledge and culture. Heritage assets are valued at insurance replacement value where available, otherwise assets are held at depreciated historic cost since the cost of obtaining a valuation would outweigh the benefits to users of the accounts. xi. Intangible assets Expenditure on non-monetary assets that do not have physical substance but are controlled by the Council as result of past events (i.e. software licences) is capitalised when it is expected that future economic benefits or service potential will flow from the intangible asset to the Council. Intangible assets are measured initially at cost. Amounts are only revalued where the fair value of assets held by the Council can be determined by reference to an active market. In practice, no intangible asset held by the Council meets this criterion, and they are therefore carried at amortised cost. The depreciable amount of an intangible asset is amortised over its useful life to the relevant service(s) line in the Comprehensive Income and Expenditure Statement. An asset is tested for impairment whenever there is an indication that the asset might be impaired – any losses recognised are posted to the relevant service line(s) in the Comprehensive Income and Expenditure Statement. xii. Interests in companies and other entities The Council has an interest in companies and other entities that have the nature of subsidiaries, associates and jointly controlled entities. In the Council’s own single entity accounts these interests are recorded as the share of net assets. xiii. Inventories Inventories are included in the Balance Sheet at the lower of cost and net realisable value. The cost of inventories is assigned using the First in First out (FIFO) costing formula. xiv. Allocation of Support Services Support services will not be recharged although the costs of services provided by the Council will be charged to separate accounts such as the Housing Revenue Account. The costs of support and other services will be allocated in government returns as required. xv. Property, plant and equipment Page 126 of 268
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Notes to the Accounts Assets that have physical substance and are held for use in the production or supply of goods or services, for rental to others or for administrative purposes, and that are expected to be used during more than one financial year are classified as Property, Plant and Equipment. Recognition Expenditure on the acquisition, creation or enhancement of Property, Plant and Equipment is capitalised on an accruals basis, provided it is probable that the future economic benefits or service potential associated with the item will flow to the Council and the cost of the item can be measured reliably. Expenditure that maintains but does not add to an asset’s potential to deliver future economic benefits or service potential (i.e. repairs and maintenance) is charged as an expense when it is incurred. Measurement Assets are initially measured at cost, comprising: • The purchase price; • Any costs attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The Council does not capitalise borrowing costs incurred whilst assets are under construction. The cost of assets acquired other than by purchase is deemed to be its fair value, unless the acquisition does not have commercial substance (i.e. it will not lead to a variation in the cash flows of the Council). In the latter case, where an asset is acquired via an exchange, the cost of the acquisition is the carrying amount of the asset given up by the Council. Assets are carried in the balance sheet using the following measurement bases: • Community assets – depreciated historical cost; • Assets under construction – historical cost; • Dwellings - current value, determined using the basis of existing use value for social housing (EUV-SH). Gross valuations are reduced by applying the discount factor which is designed to reflect that houses are only available for social use. Any new build housing and newly purchased houses are valued at historic cost; • Vehicles, Plant and Equipment – depreciated historical cost; • Surplus Assets – fair value based on open market value; • Other land and buildings – current value, determined as the amount that would be paid for the asset in its existing use (existing use value – EUV). Where there is no market-based evidence of current value because of the specialist nature of an asset, depreciated replacement cost (DRC) is used as an estimate of current value. Where non-property assets that have short useful lives or low values (or both), depreciated historical cost basis is used as a proxy for current value. Assets included in the Balance Sheet at current value are revalued as a minimum every five years to ensure their carrying amount is not materially different from their current value at year-end. As part of the Council’s plan for revaluation, a move has been made to revalue all items in a specific category in the same year, if one of the assets in the category has been revalued. Increases in valuations are matched by credits to the Revaluation Reserve to recognise any unrealised gains. Exceptionally, gains might be credited to the Page 127 of 268
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Notes to the Accounts surplus or deficit on the provision of services where they arise from the reversal of a loss previously charged to the service. Where decreases in value are identified, they are accounted for by: • Where there is a balance of revaluation gains for the asset in the Revaluation Reserve, the carrying amount of the asset is written down against that balance (up to the amount of the accumulated gains); • Where there is no balance in the Revaluation Reserve or an insufficient balance, the carrying amount of the asset is written down against the relevant service line(s) in the Comprehensive Income and Expenditure Statement (CIES). The Revaluation Reserve contains revaluation gains recognised since 1 April 2007 only, the date of its formal implementation. Gains arising before that date have been consolidated into the Capital Adjustment Account. Impairment Assets are assessed at each year-end to establish whether there is any indication that an asset may be impaired. Where indications exist and any possible differences are estimated to be material, the recoverable amount of the asset is estimated and, where this is less than the carrying amount of the asset, an impairment loss is recognised for the shortfall. Where impairment losses are identified, they are accounted for by: • Where there is a balance of revaluation gains for the asset in the Revaluation Reserve, the carrying amount of the asset is written down against that balance (up to the amount of the accumulated gains); • Where there is no balance in the Revaluation Reserve or an insufficient balance the carrying amount of the asset is written down against the relevant service line(s) in the CIES. Where an impairment loss is subsequently reversed, the reversal is credited to the Revaluation Reserve or the relevant service line(s) in the CIES, up to the amount of the original loss, adjusted for depreciation that would have been charged if the loss had not been recognised. Depreciation Depreciation is provided for on all Property, Plant and Equipment assets by the systematic allocation of their depreciable amounts over their useful lives. An exception is made for assets without a determinable finite useful life (i.e. freehold land and certain Community Assets) and assets that are not yet available for use (i.e. assets under construction). Depreciation is calculated on the following bases: • Dwellings and other buildings – straight-line allocation over the useful life of the property as estimated by the valuer; • Vehicles, plant and equipment – straight-line allocation over the useful life of the assets in Balance Sheet, as advised by a suitably qualified officer). Where an item of Property, Plant and Equipment asset has major components whose cost is significant in relation to the total cost of the item, the components are depreciated separately. Council policy is to only consider any asset with a gross book value of £1.5 million or above. The assessment of which components of these assets require to be recognised and depreciated separately is based on the cost of each of component. Significance is determined by comparing the cost of components against the overall cost of the asset. This threshold is set at 15% or more of the overall cost of the asset. Page 128 of 268
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Notes to the Accounts Revaluation gains are also depreciated, with an amount equal to the difference between current value depreciation charged on assets and the depreciation that would have been chargeable based on their historical cost being transferred each year from the Revaluation Reserve to the Capital Adjustment Account. Disposals and non-current assets held for sale When it becomes probable that the carrying amount of the asset will be recovered principally through a sale transaction rather than through its continuing use, it is reclassified as an Asset Held for Sale. The asset is revalued immediately before reclassification and then carried at the lower of this amount and fair value less costs to sell. Where there is a subsequent decrease to fair value less costs to sell, the loss is posted to the other operating expenditure Line in the CIES. Gains in fair value are recognised only up to the amount of any previously recognised losses in the Surplus or Deficit on the Provision of Services. Depreciation is not charged on Assets Held for Sale. If assets no longer meet the criteria to be classified as Assets Held for Sale, they are reclassified back to non-current assets and valued at the lower of their carrying amount before they were classified as Held for Sale; adjusted for depreciation, amortisation or revaluations that would have been recognised had they not been classified as Held for Sale, and their recoverable amount at the date of the decision not to sell. Assets that are to be abandoned or scrapped are not reclassified as Assets Held for Sale. When an asset is disposed of or decommissioned, the carrying amount of the asset in the Balance Sheet (whether Property, Plant and Equipment or Assets Held for Sale) is written off to the Other Operating Expenditure Line in the CIES as part of the gain or loss on disposal. Receipts from disposals (if any) are credited to the same line in the CIES also as part of the gain or loss on disposal (i.e. netted off against the carrying value of the asset at the time of disposal). Any revaluation gains accumulated for the asset in the Revaluation Reserve are transferred to the Capital Adjustment Account. Amounts received for a disposal in excess of £10,000 are categorised as capital receipts. The balance of receipts is credited to the Capital Fund and can then only be used for new capital investment or to defray debt. Receipts are appropriated to the Reserve from the General Fund Balance in the Movement in Reserves Statement. The written-off value of disposals is not a charge against Council Tax, as the cost of non-current assets is fully provided for under separate arrangements for capital financing. Amounts are appropriated to the Capital Adjustment Account from the General Fund Balance in the Movement in Reserves Statement. xvi. Infrastructure assets More information on the accounting for and disclosure around infrastructure assets held by the Council can be found at note 15. xvii. Public Private Partnership (PPP) and similar contracts PPP and similar contracts are agreements to receive services, where the responsibility for making available the property, plant and equipment needed to provide the services passes to the contractor. As the Council is deemed to control the services that are provided under its schemes, and where ownership of the property, plant and equipment will pass to the Council at the end of the contracts for no additional charge, the Council carries the assets used under the contracts on its Balance Sheet as part of Property, Plant and Equipment. Page 129 of 268
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Notes to the Accounts The original recognition of these assets at fair value (based on the cost to purchase the property, plant and equipment) was balanced by the recognition of a liability for amounts due to the scheme operator to pay for the capital investment. Non-current assets recognised on the Balance Sheet are re-valued and depreciated in the same way as property, plant and equipment owned by the Council. The amounts payable to operators each year are analysed into five elements: • Fair value of the services received during the year – debited to the relevant service in the Comprehensive Income and Expenditure Statement (CIES); • Finance Cost – an interest charge on the outstanding Balance Sheet liability, debited to the Financing and Investment Income and Expenditure line in the CIES, the interest charges are as follows: o Dalkeith Schools - 9.69%; o Midlothian Primary Schools - 7.29%; o Newbattle Community Campus - 5.06%; o Residual Waste Treatment Plant, Millerhill – 18.84%; • Contingent rent – increases in the amount to be paid for the property arising during the contract, debited to the Financing and Investment Income and Expenditure line in the CIES; • Payment towards liability – applied to write down the Balance Sheet liability towards the PPP operator (the profile of write-downs is calculated using the same principles as for a finance lease); • Service charge and lifecycle replacement costs – proportion of the amounts payable is posted to the Balance Sheet as a prepayment and then recognised as additions to Property, Plant and Equipment when the relevant works are eventually carried out. xviii. Provisions, contingent liabilities and contingent assets Provisions Provisions are made where an event has taken place that gives the Council a legal or constructive obligation that probably requires settlement by a transfer of economic benefits or service potential, and a reliable estimate can be made of the amount of the obligation. For instance, the Council may be involved in a court case that could eventually result in the making of a settlement or the payment of compensation. Provisions are charged as an expense to the appropriate service line in the Comprehensive Income and Expenditure Statement in the year that the Council becomes aware of the obligation, and are measured at the best estimate at the balance sheet date of the expenditure required to settle the obligation, taking into account relevant risks and uncertainties. When payments are eventually made, they are charged to the provision carried in the balance sheet. Estimated settlements are reviewed at the end of each financial year – where it becomes less than probable that a transfer of economic benefits will now be required (or a lower settlement than anticipated is made), the provision is reversed and credited back to the relevant service. Where some or all of the payment required to settle a provision is expected to be recovered from another party (i.e. from an insurance claim), this is only recognised as income for the relevant service if it is virtually certain that reimbursement will be received if the Council settles the obligation. Contingent Liabilities Page 130 of 268
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Notes to the Accounts A contingent liability arises where an event has taken place that gives the Council a possible obligation, whose existence will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within control of the Council. Contingent liabilities also arise in circumstances where a provision would otherwise be made but either it is not definite that an outflow of resources will be required, or the amount of the obligation cannot be measured reliably. Contingent liabilities are not recognised in the balance sheet but disclosed in a note to the accounts. Contingent Assets A contingent asset arises where an event has taken place that gives the Council a possible asset whose existence will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within the control of the Council. Contingent assets are not recognised in the balance sheet but disclosed in a note to the accounts where it is probable that there will be an inflow of economic benefits or service potential. xix. Reserves Reserves are created by transferring amounts out of the General Fund Balance. When Expenditure to be financed from a reserve is incurred, it is charged to the appropriate service in that year to score against the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Statement. The reserve is then transferred back into the General Fund Balance in the Movement in Reserves Statement so that there is no net charge against Council Tax for the expenditure. Certain reserves are kept to manage the accounting processes for non-current assets, financial instruments and retirement and employee benefits and do not represent usable resources for the Council – these reserves are explained in the relevant policies. xx. Revenue expenditure funded from capital under statute (Refcus) Expenditure incurred during the year that may be capitalised under statutory provisions but that does not result in the creation of a non-current asset is charged as expenditure to the relevant service line in the Comprehensive Income and Expenditure Statement in the year. Where the Council has determined to meet the cost of this expenditure from existing capital resources or by borrowing, a transfer in the Movement in Reserves Statement from the General Fund Balance to the Capital Adjustment Account then reverses out the amounts charged so there is no impact on the level of council tax. xxi. VAT VAT payable is included as an expense only to the extent that it is not recoverable from HMRC. VAT receivable is excluded from income. xxii. Fair value measurement of non-financial assets The Council measures some of its non-financial assets, such as Surplus Assets and some of its financial instruments at fair value at each reporting date. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. The fair value measurement assumes the transaction to sell the asset takes place either: • In the principal market for the asset; or • In the absence of a principal market, in the most advantageous market for the asset. Page 131 of 268
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Notes to the Accounts The Council measures the fair value of an asset using the assumptions that market participants would use when pricing the asset, assuming the market participants act in their economic best interest. When measuring the fair value of a non-financial asset, the Council takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Council uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Inputs to the valuation techniques in respect of assets and liabilities for which Fair Value is measured or disclosed in the Council’s financial statements are categorised within the fair value hierarchy, as follows: • Level 1 inputs – quoted prices (unadjusted) in active markets for identical assets that the Council can access at the measurement date; • Level 2 inputs – inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly; • Level 3 inputs – unobservable inputs for the asset. 2. Accounting Standards Issued, Not Yet Adopted The code requires disclosure of information relating to the impact of an accounting change that will be required by a new standard that has been issued but not yet adopted. This applies to the adoption of the following new or amended standards within the 2024/25 code. IFRS 16 Leases Implementation of IFRS 16 Leases will be mandatorily implemented in the Code of Practice on Local Authority Accounting in the United Kingdom (the Code) for 2024/25. Therefore, with effect from 2024/25 the Council will adopt this new accounting standard for Leases. This standard replaces IAS 17 Leases and removes the operating classification for leases where the Council acts as lessee, eliminating the ability for organisations to keep operating leases off balance sheet, by reporting them as a note to the accounts. This means that, for lease arrangements previously accounted for as operating leases, a right-of -use (ROU) asset and a lease liability will be brought onto the balance sheet as at 1 April 2024. Exemptions are applicable for low value (under £10,000) and short-term leases (12 months of less). IFRS 16 will be applied retrospectively, but with a cumulative effect being recognised as at 1 April 2024. Therefore, the ROU asset and lease liabilities will be calculated as if IFRS 16 had previously been applied but will only be recognised in 2024/25 with no prior year adjustments required. The material impact of adopting this standard is still to be determined. Other Other standards issued not yet adopted are: • Classification of Liabilities as Current or Non-current (Amendments to IAS 1); • Lease liability in a Sale and Leaseback (Amendments to IFRS 16); • Non-current Liabilities with Covenants (Amendments to IAS 1). Page 132 of 268
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Notes to the Accounts The changes will be effective from the 1st April 2024 and none are expected to have a material impact on the Council’s financial statements. 3. Critical Judgements in Applying Accounting Policies In applying the accounting policies set out in Note 1, the Council has to make certain judgements about complex transactions or those involving uncertainty about future events (see Note 4). The accounting policies considered and critical judgements made in the annual accounts are: • Uncertainty over future funding - There is a high degree of uncertainty around future levels of funding for local government, which may significantly impact the Council’s ability to maintain its property, plant and equipment. The council has determined that this uncertainty is not yet sufficient to provide an indication that the assets of the council might be impaired as a result of a reduction in funding and subsequent required changes to investment and capital strategies • Public-Private Partnerships (PPP) and similar type contracts - The Council has entered into PPP and similar type contracts for the provision of educational buildings and waste facilities as detailed in Note 33. For each of these contracts the Council has considered the tests under IFRIC 12 and concluded the following: The Council is deemed to control the services provided under the scheme and ownership of schools will pass to the Council at the end of the contract. The educational buildings are therefore all recognised as Property, Plant and Equipment on the Council’s Balance Sheet. The Council is deemed to control 20% of the services provided under the Design, Build, Finance and Maintain (DBFM) for the Residual Waste Treatment Plant (80% controlled by Edinburgh Council) and is therefore recognised as Property, Plant and Equipment on the Council’s Balance Sheet. Having considered the ownership transfers as outlined in Note 33 the Council is not deemed to control the Millerhill Food Waste Treatment Plant and has therefore concluded this is a service concession. The Council has therefore recognised assets in relation to PPP and similar type contracts on the council’s balance sheet at a net book value of £197.269 million, with a corresponding liability in relation to future payments to be made under the scheme of £88.738 million. • Associates - The Valuation Joint Board is included within the group accounts under the wider definition of an “associate” although the council holds less than 20% of voting rights that is normally presumed to confer significant influence. This is in view of the funding arrangements in place whereby the Council provides £0.562 million annually, and as such is considered to hold significant influence. Details of the impact on the Group accounts is provided in Note 38. 4. Future Assumptions and Estimation Uncertainties The Annual Accounts contain estimated figures that are based on assumptions made by the Council about the future or events that are otherwise uncertain. Estimates are made taking into account historical experience, current trends and other relevant factors. The assumptions and other sources of estimation uncertainty disclosed below relate to the estimates that require the Council’s most difficult, subjective or complex judgements. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increases, those judgements become more subjective and complex. As a result, balances cannot be determined with certainty and actual results could be materially different from the assumptions and estimates. The items in the Council’s Balance Sheet as at 31 March 2024 for which there is significant risk of material adjustment in the forthcoming year are as follows: Page 133 of 268
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Notes to the Accounts Property, Plant and Equipment Uncertainties Effect if Actual Results Differ from Assumptions The valuation of the Council’s property, plant and equipment which are subject to revaluation are subject to significant estimation due to several factors, including ongoing changes to estimates around the costs of replacing existing assets, the market value fluctuation of comparable assets used for valuation, the current condition and future maintenance costs of assets, changes to regulatory standards and the remaining useful economic lives of the assets. Given the material nature of the Council’s assets, there is a high likelihood that changes in these estimates will result in material changes in the valuation of assets on the balance sheet. The total value of the Council’s assets at 31 March 2024 is outlined and broken down by asset category at note 14. 2023/24 Revaluations In 2023/24, revaluations were undertaken for the following assets: 31 March - Housing stock discount factor, schools, community education properties, community centres and depots. The housing assets were revalued on a EUV-SH basis and totalled £507.537 million, the schools were revalued on a DRC basis and totalled schools £438.273 million, community education properties were revalued on a DRC basis and totalled £6.204 million, community centre properties were valued on a mix of market value and DRC basis and totalled £4.482 million, depots were valued on a DRC basis and totalled £6.194 million with a valuation movement of (£48.973 million) for housing, (£11.349 million) for schools, (£0.168 million) for community education properties and £1.200 million for community centres, (£0.799 million) for depots (from previous valuation (8.80%) for housing, (2.51%)for schools, (2.64%) for community education properties, 36.55% for community centres, (11.42%)for depots). The changes in valuation in assets in 2023/24, compared to 2022/23, represent updated information around the assets since the most recent full valuation, in particular the cost of replacing assets based on indices for schools, the changes in adjustments for social rent discounts for housing stock, updating housing market information, and updated information on the indices used to value community education properties, community centres and depots. Ongoing assessment of asset valuation In addition to formal valuations of property, plant and equipment on a rolling basis over a five year period, the Council assesses all assets to ensure there are no material changes that should drive an earlier valuation, to ensure that, in line with the CIPFA code, assets are revalued with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using the current value at the end of the reporting period. The council’s Corporate Estates Manager has determined in his professional opinion that, at 31 March 2024, due to the inflationary impact on School indices both High Schools and Primary Schools were subject to early revaluation. The council has also continued to assess the valuation of its asset base after the financial year end to ensure new information does not indicate a change in valuation at the balance sheet date. The net book value of all council property, plant and equipment subject to revaluation through the 5 year revaluation cycle is £1.090.21 billion. Assets revalued in 2023/24 totalled £480.067 million before revaluation. The impact of a 5% change in valuation of these would be £24.138 million, either resulting in an increase or decrease in the Council’s revaluation reserve or an additional impairment charge. There would be no impact on the Council’s general fund. Given the wide ranging nature of the assets under revaluation, as well as the differing and overlapping estimates involved in the valuations, it is not possible for management to provide an expected range of estimate outcomes going forward. However, given the experience in past years and materiality of the asset values, it is expected that these balances will continue to be subject to change as estimates are updated annually. If the useful life of the asset is reduced, depreciation increases and the carrying amount of the asset falls. It is estimated that the annual depreciation charge would increase by £7.189 million for every year that useful lives had to be reduced. Page 134 of 268
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Notes to the Accounts Uncertainties Effect if Actual Results Differ from Assumptions Assets are depreciated over useful lives that are dependent on several assumptions including the level of repairs and maintenance that will be incurred in relation to individual assets. Pension Obligation Uncertainties Effect if Actual Results Differ from Assumptions Estimation of the net obligation to pay pensions depends on several complex judgements relating to the discount rate used, the rate at which salaries are projected to increase, changes in retirement ages, mortality rates and expected returns on pension fund assets. A firm of consulting actuaries is engaged to provide the council with expert advice about the assumptions to be applied. The actuarial inputs into the pension obligation valuation are subject to annual review, and have a significant impact on the potential valuation. Historically it is common for small changes in the discount rate, salary assumption rate and pension rate to have material impacts on the year-end valuations on a year to year basis. We have outlined the potential impact of future changes below. The pension asset at 31 March 2024 following the updated actuarial valuation was £186.529 million, this is a decrease of the asset of £188.463 million on 31 March 2024. Given the history of significant changes to pension obligation valuations in the past, the ongoing sensitivity to future changes, and the requirement to update assumptions annually, the Council expects future liabilities to continue to change significantly going forward. For sensitivity purposes, we estimate that a one year increase in life expectancy would approximately increase the Employer’s Defined Benefit Obligation by around 4%, approximately £22.012 million. In practice the actual cost of a one year increase in life expectancy will depend on the structure of the revised assumption (i.e. if improvements to survival rates predominantly apply at younger or older ages). More information on the key assumptions used in the actuarial valuation of the estimates is available in note 35 to the accounts, including information on the key assumptions, risks, sensitivities and restrictions on the amount on the balance sheet arising from IFRIC 14. An update is also included in this note on the latest development around several equalisation adjustments to pension obligation which have occurred in LGPS and may continue to materially impact the valuation of the Council’s obligation going forward. The effects of the net pension obligation of changes in individual assumptions can be measured. For instance, it is estimated that a one year increase in life expectancy would approximately increase the Employers Defined Benefit Obligation by around 3-5%. However the assumptions interact in complex ways. During 2023/24 the Council’s actuary advised that the net pension obligation had decreased by £1.934 million because of estimates being corrected as a result of experience of £(17.626) million and £19.560 million attributable to updating of the financial assumptions. Arrears Page 135 of 268
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Notes to the Accounts Uncertainties Effect if Actual Results Differ from Assumptions As at 31 March the Council has Council Tax and Non-Domestic Rates debt due of £57.243 million. Management reviewed this balance at 31 March and determined that an allowance for doubtful debts, detailed in Note 23, of £44.466 million was appropriate based upon historical assessment of recoverability/review of individual balances and correspondence with third parties at year-end. However, it is recognised that in the current economic climate and taking into account the impact of Covid-19 there is increased uncertainty around the recoverability of debtor balances. Management has continued to review all material outstanding balances at the year-end subsequent to 31 March, and has not determined any further allowance is required based on recovery to date. If collection rates were to deteriorate then this will result in an increase in the provision required i.e., 1% would require an increase of £0.445 million, 3% an increase of £1.334 million and 5% an increase of £2.223 million. 5. Events After the Reporting Period The Unaudited Accounts were authorised for issue by the Chief Financial Officer on 26th June 2024. Events taking place after this date are not reflected in the annual financial statements or notes. Where events taking place before this date provided information about conditions existing at 31 March 2024, the figures in the financial statements and notes have been adjusted in all material respects to reflect the impact of this information. 6. Note to the Expenditure and Funding Analysis Adjustments between funding and accounting basis Adjustments from General Fund to arrive at the Comprehensive Income and Expenditure Amounts Adjustments for Capital Purposes Net Change for Pension Adjustments Other Adjustments Total Adjustments £000 £000 £000 £000 Current Year 2023/24 Management & Members 0 (10) 4 (6) Children’s Services, Partnerships & Communities 199 (74) (24) 101 Education 22,654 (1,017) 1,643 23,280 Adult Health & Social Care – Non-Delegated 713 0 (147) 566 Midlothian Integrated Joint Board 3,155 (206) (122) 2,827 Place 10,267 (331) 4,512 14,448 Corporate Solutions 1,964 (881) (5,450) (4,367) Housing Revenue Account 55,608 (11) 0 55,597 Joint Boards 0 0 0 0 Central Costs 74 0 0 74 Non-distributable Costs 0 0 (23) (23) Net Cost of Services 94,634 (2,530) 393 92,497 Other expenditure from the Expenditure and Funding Analysis (47,211) (9,031) (21) (56,263) Adjustments between funding and accounting basis 47,423 (11,561) 372 36,234 Application of Service Concessions 0 0 2,608 2,608 Difference between the General Fund surplus or deficit and Comprehensive Income and Expenditure surplus or deficit on the provision of services 47,423 (11,561) 2,980 38,842 Comparative Year 2022/23 Management & Members 0 138 (8) 130 Children’s Services, Partnerships & Communities 101 751 (111) 741 Page 136 of 268
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Notes to the Accounts Education 16,850 11,269 1,529 29,648 Adult Health & Social Care – Non-Delegated 756 0 36 792 Midlothian Integrated Joint Board 935 2,580 57 3,572 Place 8,446 3,284 3,063 14,793 Corporate Solutions 1,945 566 (4,513) (2,002) Housing Revenue Account 30,156 114 0 30,270 Joint Boards 0 0 0 0 Central Costs 84 0 0 84 Non-distributable Costs 0 0 (11) (11) Net Cost of Services 59,273 18,702 42 78,017 Other expenditure from the Expenditure and Funding Analysis (36,732) 1,712 (11) (35,031) Difference between the General Fund surplus or deficit and Comprehensive Income and Expenditure surplus or deficit on the provision of services 22,541 20,414 31 42,986 Adjustments for Capital Purposes This column adds in depreciation and impairment and revaluation gains and losses in the services line, and for: • Other operating expenditure – adjusts for capital disposals with a transfer of income and disposal of assets and the amounts written off for those assets. • Financing and investment income and expenditure – the statutory changes for capital financing i.e. loans fund repayments and other revenue contributions are deducted from other income and expenditure as these are not chargeable under generally accepted accounting practices. • Taxation and non-specific grant income and expenditure – Capital grants are adjusted for income not chargeable under generally accepted accounting practices. Revenue grants are adjusted from those receivable in the year to those receivable without conditions or for which conditions were satisfied throughout the year. The taxation and non-specific grant income and expenditure line is credited with capital grants receivable in the year without conditions or for which conditions were satisfied in the year. Net Change for Pensions Adjustments Net change for the removal of pension contributions and the addition of IAS 19 Employee Benefits pension related expenditure and income. • For services – this represents the removal of the employer pension contributions made by the Council as allowed by statute and the replacement with the current service costs and past service costs. • For financing and investment income and expenditure – the net interest on the defined benefit liability is charged to the Comprehensive Income and Expenditure Statement. Other Adjustments Other adjustments between amounts debited/credited to the Comprehensive Income and Expenditure Statement and the amounts payable/receivable to be recognised under statute. • For services – the amount by which officer remuneration charged to the Comprehensive Income and Expenditure Statement on an accruals basis is different from the remuneration chargeable in the year in accordance with statutory requirements. Page 137 of 268
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Notes to the Accounts • For financing and investment income and expenditure – this is the effective interest adjustment on the Council’s Lender Option/Borrower Option (LOBO) debt. 7. Adjustments Between Accounting Basis and Funding Basis Under Regulations This note details the adjustments that are made to the total comprehensive income and expenditure recognised by the Council in the year in accordance with proper accounting practice to arrive at the resources that are specified by statutory provisions as being available to the Council to meet future capital and revenue expenditure. The following sets out a description of the reserves that the adjustments are made against. General Fund Balance The General Fund is the statutory fund into which all the receipts of the Council are required to be paid and out of which all liabilities of the Council are to be met, except to the extent that statutory rules might provide otherwise. These rules can also specify the financial year in which liabilities and payments should impact on the General Fund balance, which is not necessarily in accordance with proper accounting practice. The General Fund balance therefore summarises the resources that the Council is statutorily empowered to spend on its services or on capital investment (or the deficit of resources that the Council is required to recover) at the end of the financial year. Housing Revenue Account (HRA) Balance The HRA balance reflects the statutory obligation to maintain a revenue account for local authority council housing provision in accordance with Part VI of the Local Government and Housing Act 1989. It contains the balance of income and expenditure as defined by the 1989 Act that is available to fund future expenditure in connection with the Council’s landlord function or (where in deficit) that is required to be recovered from tenants in future years. Capital Fund and Repairs and Renewals Fund The Capital Fund and the Repairs and Renewals Fund are reserves to hold funds for major capital developments and specific types of repairs and maintenance work, respectively. Whilst these funds are classed as useable reserves, they are not subject to adjustments between the funding and accounting basis. Current Year 2023/24 General Fund Reserve Housing Revenue Account Total Usable Reserves Total Unusable Reserves Adjustments between funding and accounting basis £000 £000 £000 £000 Adjustments to revenue resources Page 138 of 268
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Notes to the Accounts Amounts by which income and expenditure included in the Comprehensive Income and Expenditure Statement are different from revenue for the year calculated in accordance with statutory requirements: • Pensions Costs (transferred to/from pensions reserves) 11,495 66 11,561 (11,561) • Financial Instruments (transferred to the financial instruments adjustment account) 22 0 22 (22) • Holiday Pay (transferred to the accumulated absence reserve) (393) 0 (393) 393 • Reversal of entries included in the surplus or deficit on the provision of services in relation to capital expenditure (these items are charged to the capital adjustment account (38,558) (55,608) (94,166) 94,166 Total adjustments to revenue resources (27,434) (55,542) (82,976) 82,976 Adjustments between revenue and capital resources Statutory provision for the repayment of debt (transfer from the capital adjustment account)` 8,967 4,221 13,188 (13,188) Total adjustments between revenue and capital resources 8,967 4,221 13,188 (13,188) Adjustments to capital resources Application of capital grants to finance capital expenditure 33,554 0 33,554 (33,554) Total adjustments to capital resources 33,554 0 33,554 (33,554) Total adjustments between accounting and funding basis 15,087 (51,321) (36,234) 36,234 Application of Service Concessions (2,608) 0 (2,608) 2,608 Total Adjustments 12,479 (51,321) (38,842) 38,842 Comparative Year 2022/23 General Fund Reserve Housing Revenue Account Total Usable Reserves Total Unusable Reserves Adjustments between funding and accounting basis £000 £000 £000 £000 Adjustments to revenue resources Amounts by which income and expenditure included in the Comprehensive Income and Expenditure Statement are different from revenue for the year calculated in accordance with statutory requirements: • Pensions Costs (transferred to/from pensions reserves) (20,290) (124) (20,414) 20,414 • Financial Instruments (transferred to the financial instruments adjustment account) 10 0 10 (10) • Holiday Pay (transferred to the accumulated absence reserve) (42) 0 (42) 42 • Reversal of entries included in the surplus or deficit on the provision of services in relation to capital expenditure (these items are charged to the capital adjustment account) (29,033) (30,155) (59,188) 59,188 Total adjustments to revenue resources (49,355) (30,279) (79,634) 79,634 Adjustments between revenue and capital resources Net gain or loss on sale of non-current assets (338) 0 (338) 338 Statutory provision for the repayment of debt (transfer from the capital adjustment account) 5553 3,693 9,246 (9,246) Net revenue expenditure financed from capital under statute (84) 0 (84) 84 Total adjustments between revenue and capital resources 5,131 3,693 8,824 (8,824) Adjustments to capital resources Application of capital grants to finance capital expenditure 27,824 0 27,824 (27,824) Total adjustments to capital resources 27,824 0 27,824 (27,824) Total adjustments (16,400) (26,586) (42,986) 42,986 8. Movement in Earmarked Reserves Page 139 of 268
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Notes to the Accounts This note sets out the amounts set aside from the General Fund in earmarked reserves to provide financing for future expenditure plans and the amounts posted back from earmarked reserves to meet general fund expenditure in 2023/24. Balance at 1 April 2022 Transfers out 2022/23 Transfers in 2022/23 Balance at 31 March 2023 Transfers Out 2023/24 Transfers in 2023/24 Balance at 31 March 2024 £000 £000 £000 £000 £000 £000 £000 Scheme of Devolved Budget Management carry forwards (18,800) 18,800 (16,012) (16,012) 16,012 (15,335) (15,335) Business Transformation Programme (1,336) 267 0 (1,069) 93 0 (976) Devolved School Management Policy (1,123) 1,123 0 0 0 0 0 Transformation Blueprint 0 0 0 0 340 (2,000) (1,660) Set aside to balance 2024/25 Budget (5,576) 5,576 (1,166) (1,166) 1,166 (2,679) (2,679) Total Earmarked Reserves (26,835) 25,766 (17,178) (18,247) 17,611 (20,014) (20,650) Vat Claim not yet settled 0 0 (6,839) (6,839) 6,839 0 0 Service Concessions 0 0 0 0 4,093 (20,463) (16,370) Non-Earmarked Reserves (5,597) 1,424 (5,704) (9,877) 7,192 (6,633) (9,318) Total General Fund Balance (32,432) 27,190 (29,721) (34,963) 35,735 (47,110) (46,338) 9. Other Operating Income and Expenditure 2022/23 2023/24 £000 Other Operating Income and Expenditure £000 338 (Gains)/Losses on disposal of non-current assets (70) 338 Total (70) 10. Financing and Investment Income and Expenditure 2022/23 2023/24 £000 Financing and Investment Income and Expenditure £000 15,268 Interest payable and similar charges 16,244 1,712 Net interest on the net defined benefit liability/(asset) (9,031) (4,412) Interest receivable and similar income (7,182) 12,568 Total 31 11. Taxation and Non-specific Grant Income and Expenditure Page 140 of 268
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Notes to the Accounts 2022/23 2023/24 £000 Taxation and Non-specific Grant Income and Expenditure £000 (53,315) Council tax income (57,306) (24,813) Non-domestic rates income (35,136) (170,540) Non-ringfenced government grants (163,620) (27,824) Capital grants and contributions (note 12) (33,554) (276,492) Total (289,616) 12. Grant Income The Council credited the following grants, contributions and donations to the Comprehensive Income and Expenditure Statement in 2023/24. 2022/23 2023/24 £000 Grant Income £000 Credited to taxation non-specific grant income and expenditure (7,850) General Capital Grant (7,453) (9,822) Affordable Housing Supply Programme (6,135) (5,256) Developer Contributions (10,617) (664) General Capital Grant – Early Years Childcare (3,918) (3,000) Capital Fund Contribution (2,060) (1,017) Scottish Government Grant – Other (2,686) 0 Scottish Government – Net Zero Funding (501) (215) Other Capital Grants and Contributions (184) (27,824) Total (33,554) Credited to services (18,172) Housing Benefit Subsidy (16,786) (11,411) Early Years Expansion Grant (11,569) (394) LCITP Low Carbon Heating (6,913) (2,951) Unitary Charge Funding (2,696) (2,424) Pupil Equity Funding (2,424) (1,626) Unaccompanied Asylum Seeking Children (374) (1,407) Community Justice Grant (1,663) (1,172) South East Improvement Collaborative Grant 0 (937) Energy Efficient Scotland (1,079) (599) McMillan Funding for Improving the Cancer Journey (627) (563) UK Shared Prosperity Funds (929) 0 Child Protection Grant (608) (475) Penicuik Townscape Heritage Project (526) (3,896) Other Entities and Individuals (3,713) (46,027) Total (49,907) 13. Expenditure and Income Analysed by Nature The Group and Council’s expenditure and income, which includes adjustments between the funding and accounting basis, is analysed as follows: Page 141 of 268
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Notes to the Accounts 2022/23 2023/24 £000 Expenditure/Income £000 Expenditure 208,496 Employee expenses 192,380 239,147 Other services expenses 260,356 59,189 Depreciation, amortisation and impairment 94,560 15,268 Interest payments 16,244 338 Gain/(Loss) on disposal of non-current assets (70) 5,665 Share of operating results of associates and joint ventures 6,241 528,103 Total Expenditure 569,711 Income (95,616) Fees, charges and service income (97,665) (4,412) Interest and investment income (7,182) (53,315) Income from council tax (57,306) (333,119) Government grants and contributions (354,401) (486,462) Total Income (516,554) 41,641 Surplus or deficit on the provision of services 53,157 Page 142 of 268
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Notes to the Accounts 14. Property, Plant and Equipment Movements on Balances Movements in 2023/24 Council Dwellings Buildings Land Vehicles, Plant and Equipment Community Assets Assets Under Construction Surplus Assets Total Property, Plant & Equipment PPP & Similar Contract Assets * Cost or Valuation £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 1 April 2023 512,805 576,158 17,380 49,490 8,832 50,386 827 1,215,878 198,022 Additions 20,495 3,822 0 6,253 138 59,977 0 90,685 2 Revaluation increases/(decreases) recognised in the Revaluation Reserve (5,105) (8,449) 58 0 (102) 0 0 (13,598) (2,724) Revaluation increases/(decreases) recognised in the Surplus/Deficit on the Provision of Services (43,868) (767) (1) 0 0 0 0 (44,636) 0 De-recognition – Disposals (251) (100) (12) (1,235) 0 0 0 (1,598) 0 Reclassification of Assets 33,942 2,911 (128) 0 0 (37,066) 125 (216) 0 Balance at 31 March 2024 518,018 573,575 17,297 54,508 8,868 73,297 952 1,246,515 195,300 Accumulated Depreciation and Impairment Balance at 1 April 2023 (11,472) (15,802) 0 (32,576) (56) 0 0 (59,906) (2,397) Depreciation Charge (11,740) (29,730) 0 (4,757) (21) 0 0 (46,248) (3,161) Depreciation written out to the Revaluation Reserve 0 28,765 0 0 23 0 0 28,788 2,361 Depreciation written out to the Surplus/Deficit on the Provision of Services 0 412 0 0 0 0 0 412 0 De-recognition – Disposals 251 0 0 1,168 0 0 0 1,419 0 Balance at 31 March 2024 (22,961) (16,355) 0 (36,165) (54) 0 0 (75,535) (3,197) Net Book Value At 31 March 2024 495,057 557,220 17,297 18,343 8,814 73,297 952 1,170,980 192,103 At 31 March 2023 501,333 560,356 17,380 16,914 8,776 50,386 827 1,155,972 195,625 * PPP and similar contract assets included in ‘Land’ and ‘Buildings’ total Page 143 of 268
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Notes to the Accounts Movements in 2022/23 Council Dwellings Buildings Land Vehicles, Plant and Equipment Community Assets Assets Under Construction Surplus Assets Total Property, Plant & Equipment PPP & Similar Contract Assets * Cost or Valuation £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 1 April 2022 501,545 527,035 17,289 45,772 8,604 27,868 1,077 1,129,190 182,967 Additions 18,300 5,677 121 4,798 228 38,157 0 67,281 11 Revaluation increases/(decreases) recognised in the Revaluation Reserve (2,466) 42,642 247 0 0 0 0 40,423 15,044 Revaluation increases/(decreases) recognised in the Surplus/Deficit on the Provision of Services (19,227) 363 37 0 0 0 0 (18,827) 0 De-recognition – Disposals (206) (346) (307) (1,080) 0 0 0 (1,939) 0 Reclassification of Assets 14,859 787 (7) 0 0 (15,639) (250) (250) 0 Balance at 31 March 2023 512,805 576,158 17,380 49,490 8,832 50,386 827 1,215,878 198,022 Accumulated Depreciation and Impairment Balance at 1 April 2022 (1,100) (18,155) 0 (29,159) (38) 0 0 (48,452) (1,598) Depreciation Charge (11,166) (22,508) 0 (4,442) (18) 0 0 (38,134) (2,870) Depreciation written out to the Revaluation Reserve 350 23,450 0 0 0 0 0 23,800 2,071 Depreciation written out to the Surplus/Deficit on the Provision of Services 238 1,211 0 0 0 0 0 1,449 0 De-recognition – Disposals 206 200 0 1,025 0 0 0 1,431 0 Balance at 31 March 2023 (11,472) (15,802) 0 (32,576) (56) 0 0 (59,906) (2,397) Net Book Value At 31 March 2023 501,333 560,356 17,380 16,914 8,776 50,386 827 1,155,972 195,625 At 31 March 2022 500,445 508,880 17,289 16,613 8,566 27,868 1,077 1,080,738 181,369 * PPP and similar contract assets included in ‘Land’ and ‘Buildings’ total Page 144 of 268
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Notes to the Accounts Depreciation The following useful lives are used in the calculation of depreciation for the categories of assets, except where the useful like is known to be different from these as a consequence of a Council decision: • Council Dwellings – 40 to 60 years; • Buildings – 10 to 60 years; • Vehicles, Plant and Equipment – 5 to 10 years. Capital Commitments Capital Commitments Original Contractual Commitment £000 Outstanding at 31 March 24 £000 Housing Revenue Account Programme (HRA) • Phase 3/4 New Social Housing - Site 32-34 Newbyres 8,110 6,511 • Phase 3/4 New Social Housing – Morris Road (Newbattle HS) 25,038 22,049 • Phase 5 New Social Housing – Crichton Road 2,090 1,047 • Energy Efficiency Standard for Social Housing 2 (EESSH 2) 2,590 1,719 • Other HRA Capital Commitments 19,937 1,579 General Fund • Easthouses Primary School 19,800 6,306 • Woodburn Primary School Extension 11,368 6,685 • Other General Fund capital commitments 8,103 933 Joint-Funded Project • Extra Care Housing/Intermediate Care – Polton Street, Bonnyrigg 23,940 23,238 Total Contractual Commitment 120,976 70,067 Revaluations Valuations of the above categories of assets are undertaken by independent expert valuers engaged by the Council over a five-year rolling programme by Chartered Surveyors of the Council’s Estates department, in accordance with the Statement of Asset Valuation Practice and Guidance Notes of the Royal Institution of Chartered Surveyors. In 2023/24 valuations were undertaken for Housing stock discount factor, schools, community education, community centres and depots. The majority of asset valuations were based on either a depreciated replacement cost (DRC) basis or market value and resulted in a net downwards revaluation of assets of £7.266 million. In addition to formal valuations of property, plant and equipment on a rolling basis over a five year period, the Council assesses all assets to ensure there are no material changes that should drive an earlier valuation, to ensure that, in line with the CIPFA code, assets are revalued with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using the current value at the end of the reporting period. The council’s Corporate Estates Manager has determined in his professional opinion that, at 31 March 2024, due to the inflationary impact on School indices both High Schools and Primary Schools were subject to early revaluation. The Council has continued to assess the valuation of its asset base subsequent to the financial year end as summarised in note 4 to these financial statements. 15. Infrastructure Assets Page 145 of 268
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Notes to the Accounts The Council’s infrastructure assets have been recorded on the Balance Sheet at depreciated historic cost. A useful life of 15 years is applied to these assets and used in the calculation of the annual depreciation charge, based on the Council’s assessment of the average useful economic life of these assets, with the exception of where the useful life is known to be different from this amount as a consequence of a Council decision. On 29 August 2022, the Scottish Government confirmed in Local Government Finance Circular 09/2022 that it has provided a temporary statutory override to the accounting and disclosure requirements related to infrastructure assets in local government financial statements, whilst more permanent updates are developed within the CIPFA/LASAAC Code of Practice for Local Authority Accounting (“the Code”). The allowed changes are applicable for the 2021/22 financial year through to the 31 March 2024 financial year. The Council has applied both statutory overrides for infrastructure assets: • Statutory Override 1: For accounting periods commencing from 1 April 2021 until 31 March 2024 a local authority is not required to report the gross cost and accumulated depreciation for infrastructure assets. • Statutory Override 2: For accounting periods commencing from 1 April 2010 until 31 March 2024 the carrying amount to be derecognised in respect of a replaced part of an infrastructure asset is to be taken to be and accounted for as zero. No subsequent adjustment shall be made to the carrying amount of the asset with respect to that part. 2022/23 2023/24 £000 Infrastructure Assets £000 31,375 Net carrying amount at 1 April 34,819 (3,501) Depreciation (3,956) 6,945 Additions 7,560 34,819 Balance outstanding at 31 March 38,423 16. Heritage Assets The Council’s chains and badges of office are the main heritage assets and have been included in the Balance Sheet at reinstatement cost, obtained from the Council’s insurer. 2022/23 2023/24 £000 Heritage Assets £000 329 Net carrying amount at 1 April 458 (3) Depreciation (2) 7 Additions 0 125 Revaluations and restatements 0 458 Balance outstanding at 31 March 456 17. Intangible Assets Page 146 of 268
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Notes to the Accounts The Council accounts for its software as intangible assets, to the extent that the software is not an integral part of a particular IT system and accounted for as part of the hardware item Property, Plant and Equipment. The intangible assets include software licences, warranties and internally generated assets. The movement on Intangible Asset balances during the year is as follows: 2022/23 2023/24 £000 Intangible Assets £000 Balance at start of year 2,921 • Gross carrying amounts 2,946 (2,573) • Accumulated amortisation (2,744) 348 Net carrying amount at 1 April 202 25 Additions - purchases 26 (171) Amortisation for the period (124) 202 Net carrying amount at 31 March 104 Comprising 2,946 • Gross carrying amounts 2,972 (2,744) • Accumulated amortisation (2,868) 202 104 18. Long-term Debtors 2022/23 2023/24 £000 Long-term Debtors £000 4,138 Prepayment to PPP contractor 4,113 52 Pacific Shelf 58 4,190 Balance outstanding at 31 March 4,171 19. Financial Instruments Categories of Financial Instruments 31 Mar 2023 31 Mar 2024 Non- Current £000 Current £000 Total £000 Financial Assets Category Non- Current £000 Current £000 Total £000 0 20,122 20,122 Short/long-term deposits (below) Amortised Cost 0 30,017 30,017 0 36,994 36,994 Debtors (Note 23) Amortised Cost 0 22,878 22,878 11,693 0 11,693 Long-term investments (below) Fair value through other comprehensive income 11,526 0 11,526 11,693 57,116 68,809 Total Financial Assets 11,526 52,895 64,421 0 3,817 3,817 Debtors not defined as financial instruments 0 15,236 15,236 11,693 60,933 72,626 Total 11,526 68,131 79,657 The short and long-term deposits on the balance sheet comprises: 31 Mar 2023 31 Mar 2024 Long-term £000 Short-term £000 Total £000 Deposits Long-term £000 Short-term £000 Total £000 Page 147 of 268
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Notes to the Accounts 0 0 0 Other local authorities 0 0 0 0 20,122 20,122 Commercial banks/building societies 0 30,017 30,017 0 20,122 20,122 Total Deposits 0 30,017 30,017 31 Mar 2023 31 Mar 2024 Non- Current £000 Current £000 Total £000 Financial Liabilities Category Non- Current £000 Current £000 Total £000 321,490 3,195 324,685 Borrowings (below) Amortised Cost 339,971 3,797 343,768 76,699 3,120 79,819 PPP Liability (Note 33) Amortised Cost 73,347 3,352 76,699 12,040 573 12,613 PPP Donated Asset Liability (Note 33) Amortised Cost 11,471 568 12,039 0 29,623 29,623 Creditors Amortised Cost 0 33,331 33,331 410,229 36,512 446,741 Total Financial Liabilities 424,789 41,048 465,837 0 28,923 28,923 Creditors not defined as financial instruments 0 17,629 17,629 410,229 65,434 475,663 Total 424,789 58,677 483,466 The Council’s borrowing is presented in the Balance Sheet as the outstanding principal repayable (plus accrued interest) and interest charged to the Comprehensive Income and Expenditure Statement is the amount payable for the year according to the loan agreement. Borrowing is classed as either a long-term liability, repayable after twelve months or longer, or a current liability if it is repayable within twelve months. The external borrowing as shown in the Balance Sheet comprises: 31 Mar 2023 31 Mar 2024 Long-term £000 Short- term £000 Total £000 External Borrowings Long-term £000 Short-term £000 Total £000 284,580 2,008 286,588 PWLB Loans 303,897 2,630 306,527 20,549 284 20,833 Lender Option/Borrower Option (LOBO) Loans 20,526 286 20,812 16,361 903 17,264 Loans from commercial banks and other local authorities 15,548 881 16,429 321,490 3,195 324,685 Total Deposits 339,971 3,797 343,768 Loans Fund Deferral of Repayments Loans Fund Principal repayments were deferred in 2022/23 under the Local Government Finance Circular 5/2022 provisions. The term over which deferred repayments will be repaid are in line with the provisions of the circular, as follows:- Deferred Principal Repayments – Loans Fund £000’s Within 1 year 287 Within 2 to 5 Years 835 Page 148 of 268
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Notes to the Accounts Within 6 to 10 Years 711 Within 11 to 15 Years 317 Within 16 to 20 Years 274 Total 2,424 Investments Designated at Fair Value through Other Comprehensive Income Fair value of equity instruments designated at Fair Value through Other Comprehensive Income include the following: 31 Mar 2023 £000 Non-current Assets (Long-term) Input Level in Fair Value Hierarchy (see note 1 viii) 31 Mar 2024 £000 5,758 Equity Shareholding in Lothian Buses Level 2 5,594 325 Subordinated Debt Subscription in Newbattle DBFMCo Level 3 324 5,610 Midlothian Energy Limited Shareholding Level 3 5,610 11,693 Total 11,528 Lothian Buses Plc Midlothian Council holds a 5.5% shareholding in Lothian Buses plc, a company incorporated in January 1986 under the terms of the Transport Act 1985 to operate buses in the City of Edinburgh and its surrounding area. The valuation basis for the Council’s shareholding (350,000 £1 ordinary shares) is calculated as net share of equity attributable to equity holders, in line with the published results for the year ended 31 December 2023. The IAS 19 Pension Asset/Liability has now been removed from calculations due to its volatility, as demonstrated in the on-year movement in the transfer to/from reserves figure in the table below. Note 36 provides more detail on the potential guarantee liability associated with investment. Year to 31 Dec 22 Year to 31 Dec 23 £000 Lothian Buses £000 Profit/(Loss): 5,978 Profit/(Loss) before taxation 16,760 (1,443) Taxation (2,178) 4,535 Profit/(Loss) after Tax 14,582 Other Relevant Financial Information: 165,844 Revenue 183,508 0 Ordinary Dividend 3,200 (5,271) Transfer to/(from) reserves 25,841 105,277 Equity attributable to equity holders (excluding IAS 19 Pension Asset/Liability) 102,266 Newbattle DBFMco Ltd In 2017/18, the Council subscribed £0.333 million of subordinated debt in Newbattle DBFMco Limited, a company set up specifically to deliver the Council’s Schools Newbattle Community Campus project. Whilst the investment is sellable in the secondary market, the valuation basis for the Council’s shareholding (nominal value of loan stock £0.333 million) is calculated based on the subscription value as there is no equivalent market data to estimate resale value. The principal on this investment will be repaid fully over the 25-year project life. Interest will be paid biannually at 10.5% coupon based on the average principal outstanding over the relevant 6-month period. Midlothian Energy Ltd Page 149 of 268
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Notes to the Accounts In 2021/22, the Council entered into a 50:50 joint venture with Vattenfall Heat UK to create Midlothian Energy Limited, a company set up specifically to generate, distribute and supply energy within Midlothian. The carrying value of the Council investment in Midlothian Energy Limited represents the funds invested in 2022. The published results for Midlothian Energy Limited for the year ended 31 December 2023 are summarised below. Year to 31 Dec 22 Year to 31 Dec 23 £000 Midlothian Energy Ltd £000 Profit/(Loss): (956) Profit/(Loss) before taxation 48 (1) Taxation (41) (957) Profit/(Loss) after Tax 7 Other Relevant Financial Information: 3,020 Shares Issued During the Period 11,220 (2,766) Accumulated Losses (2,758) 254 Total Equity 8,462 Income, Expenses, Gains and Losses 2022/23 2023/24 Income, Expenses, Gains and Losses Surplus or deficit on the provision of services £000 Other comprehensive income and expenditure £000 Surplus or deficit on the provision of services £000 Other comprehensive income and expenditure £000 Net gains/losses on: • Investments in equity instruments designated at fair value through other comprehensive income 0 1,117 0 (165) Total net gains/(losses) 0 1,117 0 (165) Interest revenue: • Financial assets measured at amortised cost 3,260 0 4,590 0 Total Interest Revenue 3,260 0 4,590 0 Interest Expense 9,868 0 9,752 0 Fee Expense: • Financial assets or financial liabilities that are not at fair value through profit and loss 122 0 167 0 Total Fee Expense 122 0 167 0 Fair Values of Financial Assets and Financial Liabilities Except for the financial assets carried at fair value through other comprehensive income, all other financial liabilities and financial assets held by the Council are carried in the Balance Sheet at amortised cost. The fair values calculated for these instruments are as follows: 31 Mar 2023 31 Mar 2024 Carrying Amount £000 Fair Value £000 ` Financial Liabilities Carrying Amount £000 Fair Value £000 286,588 205,583 PWLB Loans (Level 2) 306,526 209,199 Page 150 of 268
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Notes to the Accounts 20,833 20,282 Lender Option/Borrower Option (LOBO) Loans (Level 2) 20,812 18,666 17,264 14,716 Loans from commercial lenders and other local authorities (Level 2) 16,430 13,469 29,623 29,623 Creditors 33,331 33,331 79,819 79,819 PPP Finance Lease Liability 76,699 76,699 12,613 12,613 PPP Donated Asset Account Liability 12,039 12,039 446,740 362,636 Total Financial Liabilities 465,837 363,403 The fair value for borrowings have been arrived at using a discounted cash flow analysis, with the most significant inputs being the discount rate. The fair value of borrowing is lower than the carrying amount because the Council’s portfolio of loans includes a number of loans where the interest rate payable is lower than the prevailing rates at the balance sheet date. The commitment to pay interest below current market rates reduces the amount the Council would have to pay if the lender requested or agreed to early repayment of the loans. 31 Mar 2023 31 Mar 2024 Carrying Amount £000 Fair Value £000 ` Financial Assets Carrying Amount £000 Fair Value £000 20,122 20,122 Short/Long-term Deposits 30,017 30,017 36,994 36,994 Debtors 22,878 22,878 57,116 57,116 Total Financial Assets 52,895 52,895 Short-term debtors and creditors are carried at cost as this is a fair approximation of their value. The fair value for financial liabilities and financial assets that are not measured at fair value can be assessed by calculating the present value of the cash flows that will take place over the remaining term of the instruments, using the following assumptions: Financial Assets Financial Liabilities - The valuation of fixed term deposits (maturity deposits) is made by comparison of the fixed term deposit with a comparable deposit with the same/similar lender for the remaining period of the deposit. - No early repayment is recognised. - The fair value of receivables is taken to be the invoiced or billed amount. - Estimated ranges of interest rates at 31 March 2024 for loans payable based on new lending rates for equivalent loans at that date. - The fair value of payables is taken to be the invoiced or billed amount. 20. Nature and Extent of Risks Arising from Financial Instruments The Council’s activities expose it to a variety of financial risks including: • Credit risk – the possibility that other parties might fail to pay amounts due to the Council; • Liquidity risk – the possibility that the Council might not have funds available to meet its commitments to make payments; • Market risk – the possibility that financial loss might arise for the Council as a result of the changes in such measures as interest rates and stock market movements. Page 151 of 268
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Notes to the Accounts The Council has fully adopted CIPFA’s Code of Treasury Management in the Public Services Code of Practice and set treasury management indicators to control key financial instrument risks in accordance with CIPFA’s Prudential Code. The Council’s management of treasury risks actively works to minimise the Council’s exposure to the unpredictability of financial markets and to protect the financial resources available to fund services. Credit Risk Credit risk arises from deposits with banks and financial institutions, as well as credit exposures to the Council’s customers. The risk is minimised through the Council’s Treasury Management Strategy, which is set annually and is monitored throughout the year. The strategy sets out the limits on both duration and maximum levels of deposits. The lower an institution’s creditworthiness the lower the maximum duration and level of deposit will be. These Counterparties are chosen, by officers, using credit data supplied by the Council’s treasury advisers (based on data from the three main credit rating agencies, overlaid by: • Credit watches and credit outlooks from credit rating agencies; • Credit Default Swap (CDS) spreads to give early warning of likely changes in credit ratings; • Sovereign ratings to select counterparties from only the most creditworthy countries. It is the policy of the Council to place deposits only with a limited number of banks and building societies whose credit rating is independently assessed as sufficiently secure by the Council’s treasury advisers and to restrict lending to a prudent maximum amount for each institution. The Council also has a policy of limiting deposits to £15 million per institution, other than for UK Nationalised and Part-Nationalised institutions where the maximum is extended to £30 million. No credit limits were exceeded during the financial year. The expected credit loss for the Council’s financial assets held at amortised cost has been calculated to be £0.010 million (2022/23 £0.013 million). The Council deems this immaterial and therefore has not included any impact of this with the Comprehensive Income and Expenditure Statement (CIES). The expected credit loss for the Council’s financial assets held at FVOCI is expected to be zero, calculated on the following basis: • Lothian Buses Shareholding – dividend of £0.175 million was received during the year, the first since 2019; it was previously estimated that dividend would not be received until 2026; • Subordinated Debt Investment in Newbattle DBFM Co SPV – Whilst there is no directly observable indicators which would allow an expected credit loss for this investment to be accurately calculated, there are no indications of adverse performance with the DBFM Co or any indications that future scheduled lifecycle maintenance will not be able to take place or senior and/or subordinated debt will not be able to be repaid. The Council will continue to review the performance of the SPC on an annual basis; • Midlothian Energy Ltd – Whilst there is no directly observable indicators which would allow an expected credit loss for this investment to be accurately calculated, there are no indications of adverse performance. The Council will continue to review the performance of the company on an annual basis. An age analysis of cash and cash equivalents and short-term deposits is shown in the table below: 2022/23 £000 Financial Assets 2023/24 £000 87,228 Less than three months 27,505 0 Between three and six months 10,006 20,122 Between six months and one year 20,011 Page 152 of 268
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Notes to the Accounts 0 More than one year 0 107,350 Total Financial Assets 57,522 Liquidity Risk The Council manages its liquidity position through the approval of treasury investment strategy reports and through a comprehensive cash flow management system as required by CIPFA Code of Practice. This seeks to ensure that cash is available as needed. If unexpected movements happen, the Council has ready access to borrowings from the money markets and the Public Works Loan Board. There is no significant risk that it will be unable to raise finance to meet its commitments under financial instruments. Instead the risk is that the Council will be bound to replenish a significant proportion of its borrowings at a time of unfavourable interest rates. The Council sets limits on the proportion of its fixed rate borrowing during specified periods. The strategy is that loan maturities are spread across financial years to mitigate refinancing risk, through a combination of careful planning of new loans taken out and (where it is economic to do so) making early repayments. The maturity analysis of financial liabilities is as follows: 2022/23 £000 Financial Liabilities 2023/24 £000 3,195 Less than one year 3,797 1,506 Between one and two years 1,275 2,832 Between two and five years 22,362 45,208 Between five and ten years 45,184 32,439 Between ten and twenty years 42,582 39,904 Between twenty and thirty years 41,681 84,601 Between thirty and forty years 81,887 110,000 Between forty and fifty years 100,000 5,000 More than fifty years 5,000 324,685 Total Financial Liabilities 343,768 All trade and other payables are due to be paid in less than one year. Market Risk Interest Rate Risk The Council is exposed to interest rate risk in terms of its exposure to interest rate movements on its borrowings and investments. Movements in interest rates have a complex impact on the Council. For instance, a rise in interest rates would have the following effects: The current interest rate risk for the Council is summarised below: • Borrowings at variable rates - the interest charged to the surplus or deficit on the provision of services will rise; • Borrowings at fixed rates – the fair value of the liabilities will fall; • Deposits at variable rates - the interest income credited to the surplus or deficit on the provision of services will rise; • Deposits at fixed rates - the fair value of the assets will fall. Borrowings are not carried at fair value, so normal gains and losses on fixed rate borrowings would not impact on the surplus or deficit on the provision of services of other comprehensive income and expenditure. However, changes in interest payable and receivable on variable rate borrowings and deposits will be posted to the surplus or deficit on the provision of services and affect the General Fund balance. Page 153 of 268
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Notes to the Accounts The Council has a number of strategies for managing interest rate risk. The Council’s policy is to aim to keep a maximum of 30% of its borrowings in variable rate loans. During periods of falling interest rates, and where economic circumstances make it favourable, fixed rate loans will be repaid early to limit exposure to losses. The treasury management team has an active strategy for assessing interest rate exposure that feeds into the setting of the annual budget and which is used to update the budget quarterly during the year. This allows any adverse changes to be accommodated. The analysis will also advise whether new borrowing taken out is fixed or variable. According to this assessment strategy, at 31 March 2024, if interest rates had been 1% higher with all other variables held constant, the financial effect would be: 2022/23 £000 2023/24 £000 Impact on taxpayer and rent payer: 0 Increase in interest payable on variable rate borrowings 0 1,599 Increase in interest receivable on variable rate instruments 1,047 1,599 Impact on Surplus/Deficit on the Provision of Services 1,047 Other presentational changes: (31,176) Decrease in fair value of fixed rate borrowing liabilities (no impact on the Surplus/Deficit on the Provision of Services or Other Comprehensive Income and Expenditure) (28,791) The impact of a 1% fall in interest rates would be as above but with the movements being reversed. Price Risk There is no price risk associated with the Council’s available for sale investments specified in Note 19 of the Financial Statements. Foreign Exchange Risk The Council has no financial assets or liabilities denominated in foreign currencies and thus has no exposure to loss arising from movements in exchange rates. 21. Assets Held for Sale 2022/23 £000 Assets Held for Sale 2023/24 £000 1,480 Balance outstanding at 1 April 1,080 250 Assets newly classified as held for sale 216 0 Revaluations and restatements 394 (650) Assets sold 0 1,080 Balance outstanding at 31 March 1,690 22. Inventories 2022/23 £000 Inventories 2023/24 £000 983 Balance outstanding at 1 April 1,023 1,123 Purchases 973 (1,083) Recognised as an expense in the year (1,024) Page 154 of 268
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Notes to the Accounts 1,023 Balance outstanding at 31 March 972 23. Debtors 2022/23 2023/24 £000 Short-Term Debtors £000 17,207 Central Government Bodies 7,096 1,538 Other Public Sector Bodies 5,293 Other Entities and Individuals (net of Impairment for bad debts)*: 9,082 • Council Tax and Non-Domestic Rates 12,777 3,613 • Rents 3,608 9,371 • Other trade debtors 9,340 40,811 Total Short-Term Debtors 38,114 * For impairment, significant individual balances are considered before a collective impairment of all remaining debtors based on their age profile. Impairment is applied to all outstanding debt at the balance sheet date for Council Tax and Non-Domestic Rates of £44.466 million (2022/23 £41.213 million) and Rents of £3.380 million (2022/23 £2.710 million). For sundry debtors, all debts that are over six months past their payment date impairment will be applied of £2.689 million (2022/23 £2.552 million), of which £1.761 million relates to housing benefit overpayments (2022/23 £1,752 million). 24. Cash and Cash Equivalents The balance of cash and cash equivalents is made up of the following elements: 2022/23 2023/24 £000 Cash and Cash Equivalents £000 408 Cash held by the Council 441 95,183 Short-term Deposits 26,793 63 Bank Current Accounts 271 95,654 Total Cash and Cash Equivalents 27,505 25. Creditors 2022/23 £000 Creditors 2023/24 £000 447 Central Government Bodies 311 10,124 Other Public Sector Bodies 2,199 47,975 Other Entities and Individuals 48,450 58,546 Creditors 50,960 26. Provisions Uninsured Losses (1) Total £000 £000 Balance at 1 April 2023 1,239 1,239 New provisions made during the year 648 648 Increase/(decrease) to existing insurance provisions during the year (55) (55) Amounts used during the year (538) (538) Balance at 31 March 2024 1,294 1,294 Page 155 of 268
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Notes to the Accounts Notes: (1) This relates to potential uninsured losses arising from insurance claims made against the Council. 27. Grants Received in Advance The Council has received a number of grants and contributions that have yet to be recognised as income as they have conditions attached to them that will require the monies to be returned to the grantor. The balances at year-end are as follows: 2022/23 2023/24 £000 Grants Received in Advance (Capital Grants) £000 43,432 Balance at 1 April 44,731 New capital grants received in advance, conditions of use not yet met: 461 Scottish Government Place Based Investment Programme 366 7,940 Section 75 contributions from private developers 8,327 0 Other Grants Received in Advance 25 8401 Total Grants Received in Advance During the Financial Year 8,718 (7,102) Amounts realised to CIES, conditions of use met (12,628) 44,731 Balance at 31 March 40,821 28. Usable Reserves Movements in the Council’s usable reserves are detailed in the Movement in Reserves Statement. 29. Unusable Reserves 2022/23 2023/24 £000 Unusable Reserves £000 (325,527) Revaluation Reserve (319,859) (5,408) Financial Instruments Revaluation Reserve (5,243) (435,891) Capital Adjustment Account (386,625) 1,491 Financial Instruments Adjustment Account 1,310 7,800 Pensions Reserve 7,612 8,602 Accumulated Absences Account 8,995 (748,933) Total Unusable Reserves (693,810) Revaluation Reserve The Revaluation Reserve contains the gains made by the Council arising from increases in the value of its Property, Plant and Equipment and Intangible Assets. The balance is reduced when assets with accumulated gains are: • Revalued downwards or impaired and the gains are lost; • Used in the provision of services and the gains are consumed through depreciation; or Page 156 of 268
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Notes to the Accounts • Disposed of and the gains are realised. The reserve contains only revaluation gains accumulated since 1st April 2007, the date the reserve was created. Accumulated gains arising before that date are consolidated into the balance on the Capital Adjustment Account. 2022/23 2023/24 £000 Revaluation Reserve £000 (272,696) Balance at 1 April (325,527) (69,575) (Surplus) or deficit on revaluation of non-current assets not posted to the surplus or deficit on the provision of services (16,939) 16,081 Difference between fair value depreciation and historical cost depreciation 22,502 Amounts written off to the Capital Adjustment Account 663 Accumulated (gains)/losses on assets sold or scrapped 105 663 Amount written off to the Capital Adjustment Account 105 (325,527) Balance at 31 March (319,859) Financial Instruments Revaluation Reserve The Financial Instruments Revaluation Reserve contains the gains made by the Council arising from increases in the value of its investments that at measured at fair value through other comprehensive income. The balance is reduced when investments with accumulated gains are: • Revalued downwards and the gains are lost; • Disposed of and the gains are realised. 2022/23 2023/24 £000 Financial Instruments Revaluation Reserve £000 (4,292) Balance at 1 April (5,408) (1,116) (Upward)/Downward Revaluation of Investments 163 (5,408) Balance at 31 March (5,243) Capital Adjustment Account The Capital Adjustment Account absorbs the timing differences arising from the different arrangements for accounting for the consumption of non-current assets and for financing the acquisition, construction or enhancement of those assets under statutory provisions. The account is debited with the cost of acquisition, construction or subsequent costs such as depreciation, impairment losses and amortisations are charged to the Comprehensive Income and Expenditure Statement. The account is credited with the amounts set aside by the Council as finance for the costs of acquisition, construction and subsequent expenditure. The account contains revaluation gains accumulated on property, plant and equipment before the 1st April 2007, the date that the Revaluation Reserve was created to hold such gains. Note 7 provides further details of transactions posted to the account, apart from those involving the revaluation reserve. Page 157 of 268
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Notes to the Accounts 2022/23 2023/24 £000 Capital Adjustment Account £000 £000 (447,420) Balance at 1 April (435,891) Opening Balance adjustment – Service concessions 20,463 Revised Opening Balance (415,428) Reversal of items relating to capital expenditure debited or credited to the Comprehensive Income and Expenditure Statement (CIES): 25,558 • Charges for depreciation and impairment on non-current assets 27,704 22,603 • Revaluation movements on property, plant and equipment 45,580 171 • Amortisation of intangible assets 124 84 • Revenue expenditure funded from capital under statute 74 1,158 • Amounts of non-current assets written off on disposal or sale as part of the gain/loss on disposal to the CIES 179 49,574 73,661 (663) Adjusting amounts written out of the Revaluation Reserve (105) 48,911 Net written out amount of the cost of non-current assets consumed in the year 73.556 Capital financing applied in the year: (991) Use of capital receipts to finance new capital expenditure (249) (27,824) Capital grants and contributions credited to the CIES that have been applied to capital financing (33,554) (7,178) Statutory provision for the financing of capital investment charged against the General Fund and HRA balances (11,116) 0 Application of Service concessions 2,608 (1,078) Use of Capital Fund reserve to finance Capital Expenditure (1,822) (37,071) (44,133) (311) Other movements (620) (435,891) Balance at 31 March (386,625) Financial Instruments Adjustment Account The Financial Instruments Adjustment Account absorbs the timing differences arising from the different arrangements for accounting for income and expenses relating to certain financial instruments and for bearing losses or benefiting from gains per statutory provisions. 2022/23 2023/24 £000 Financial Instruments Adjustment Account £000 1,660 Balance at 1 April 1,491 (159) Premiums incurred in the year (159) (10) Amount by which finance costs charged to the CIES are different from finance costs chargeable in year in accordance with statutory requirements (22) 1,491 Balance at 31 March 1,310 Pensions Reserve The Pension Reserve absorbs the timing differences arising from the different arrangements for accounting for post-employment benefits and for funding benefits in accordance with statutory provisions. The Council accounts for post-employment benefits in the Comprehensive Income and Expenditure Statement (CIES) as the benefits earned by employees accruing years of service, updating the liabilities recognised to reflect inflation, changing assumptions and investment returns on any resources set aside to meet the costs. However, statutory arrangements require benefits earned to be financed as the Council makes employers contributions to pension funds or eventually pays any pensions for which it is directly responsible. The pension reserve mirrors the net pension asset/liability, as detailed in Note 35. Page 158 of 268
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Notes to the Accounts 2022/23 2023/24 £000 Pensions Reserve £000 54,160 Balance at 1 April 7,800 (255,237) Re-measurements of the net defined benefit liability/(asset) (182,768) 39,147 Reversal of items relating to net changes for retirement benefits charged to Surplus or Deficit on the Provision of Services in the CIES 8,453 (18,733) Employers’ pension contributions (20,014) 188,463 Restriction Adjustment under IFRIC 14 194,141 7,800 Balance at 31 March 7,612 Accumulated Absences Account The Accumulated Absences Account absorbs the differences that would otherwise arise on the General Fund Balance from accruing for compensated absences earned but not taken in the year, e.g. annual leave entitlement carried forward at 31 March. Statutory arrangements require that the impact on the General Fund Balance is neutralised by transfers to or from the account. 2022/23 2023/24 £000 Accumulated Absences Account £000 £000 8,560 Balance at 1 April 8,602 (8,560) Settlement or cancellation of accrual made at the end of the preceding year (8,602) 8,602 Amounts accrued at the end of the current year 8,995 42 Amount by which officer remuneration charged to the CIES on an accruals basis is different from remuneration chargeable in the year in accordance with statutory requirements 393 8,602 Balance at 31 March 8,995 30. External Audit Costs The estimated fee payable by the Council to Audit Scotland in respect of the work conducted for external audit services is £0.290 million (2022/23 £0.273) million). Where further additional work is required, fees will be agreed with management and reported to the Audit Committee. 31. Related Parties The Council is required to disclose material transactions with related parties - bodies or individuals that have the potential to control or influence the Council, or to be controlled or influenced by the Council. Disclosure of these transactions allows readers to assess the extent to which the Council might have been constrained in its ability to operate independently or might have secured the ability to limit another party’s ability to bargain freely with the Council. The Scottish Government The Scottish Government has significant influence over the general operations of the Council – it is responsible for providing the statutory framework within which the Council operates, provides much of its funding in the form of grants, and prescribes the terms of many of the transactions that the Council has with other parties (such as Council Tax bills and Housing Benefits). Further information is contained with Note 11 Taxation and Non-specific Grant Income and Note 12 Grant Income in the Annual Accounts. Elected Members Elected members of the Council have direct control over the Council’s financial and operating policies. The total of members’ allowances paid in 2023/24 is shown in the Remuneration Report. Page 159 of 268
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Notes to the Accounts Members’ Register of Interests can be viewed on the Council’s website. A review of these interests has been conducted. Related party interests for which transactions exist in 2023/24 were declared by nine members: • With voluntary bodies or charitable organisations that received funding totalling an estimated value of £0.231 million; • With businesses or other organisations that have contracted for goods and services with the Council to the estimated value of £0.710 million. In addition to the above many members have relationships or hold positions with other public bodies and voluntary organisations with which the Council does not have a financially material relationship but with which the Council has a financial or influential relationship. Officers There are no related party transactions with officers of the Council. Other Public Bodies The Council has a number of joint working arrangements with other local authorities. In 2023/24 payments of £1.942 million were made to other local authorities and income of £0.705 million was received from other local authorities. Midlothian Integration Joint Board The Council works in partnership with NHS Lothian, providing a range of Health and Social Care services across Midlothian. NHS Lothian transferred £4.903 million of resource transfer funding to the Council in 2023/24 in respect of activities delegated to the Midlothian Integration Joint Board, as well as an additional £4.816 million in relation to Social Care Fund, £1.324 million from the Integrated Care Fund. The funding supports various Adult Social Care services, both purchased and in-house. NHS Lothian employs the Joint Director of Health and Social Care. Midlothian Council is recharged for 50% of the cost of this post. Details are included in the Remuneration Report. The Council delegated resources totalling £57.416 million to the Midlothian Integration Joint Board in 2023/24. These resources were allocated to the Council for the provision of Adult Social Care services. NHS Lothian also delegated financial resources to the Board. The Board provides the strategic direction in relation to the delivery of Health and Adult Social Care Services in Midlothian. The Council provides assistance in kind in terms of Board staff (Chief Officer) and administrative support for the operation of the Board. In addition no charge is made for central support functions provided over and above the resources delegated which relate specifically to Adult Social Care. As at 31 March 2024 the Council held £0.418 million on behalf of the Board. Other Entities Controlled or Significantly Influenced by the Council During the year, the Council entered into material transactions with the Lothian Valuation Board. This amounted to £0.562 million (2022/23 £0.565 million). There was no balance due to or from the Lothian Valuation Board as at 31 March 2024. Midlothian Energy Limited was set up in 2021/22 as a 50:50 joint venture with Vattenfall Heat UK to generate, distribute and supply energy. The company has been consolidated into the Group Accounts and details of all other entities in which the Council has significant interest are explained in the Group Accounts in Note 38. 32. Capital Expenditure and Capital Financing Page 160 of 268
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Notes to the Accounts The total amount of capital expenditure incurred in the year is shown in the table below (including the value of assets acquired under finance leases and PPP contracts), together with the resources that have been used to finance them. 2022/23 2023/24 £000 Capital Expenditure and Capital Financing £000 394,504 Opening Capital Financing Requirement 431,462 0 Opening Balance Adjustment – Service concessions 20,463 394,504 Revised Opening Capital Financing Requirement 451,925 Capital Investment: 18,300 Council Dwellings 20,495 5,666 Buildings 3,820 121 Land 0 4,798 Vehicles, Plant & Equipment 6,253 228 Community Assets 138 38,157 Assets under Construction 59,488 6,945 Infrastructure Assets 7,560 7 Heritage Assets 0 26 Intangible Assets 26 85 Revenue Expenditure funded by Capital Under Statute 74 10 Public, Private Partnership (PPP) 2 74,343 Total Capital Investment 97,856 Sources of Finance: (3) Capital Receipts (60) 0 Application of Service Concessions 2,608 (3,000) Capital Fund Applied (2,000) (24,824) Government Grants and Other Contributions (31,494) 0 Donated asset (400) (9,558) Loans fund and PPP Finance lease repayments (13,408) (37,385) Total Sources of Finance (44,754) 36,958 Increase/(decrease) in Capital Financing Requirement 53,102 431,462 Closing Capital Financing Requirement 505,027 33. Public Private Partnership (PPP) and Similar Contracts The Council has entered into five such contracts: Dalkeith Schools Campus This is a 30-year PPP contract with Dalkeith SPV Ltd for the provision and facilities management of the Campus. When the agreement ends in 2034 the Campus facilities will transfer to the Council with a guaranteed maintenance - free life of five years. The contractor does not have any right of renewal on contract expiry. Termination of contract is either at contract end date or following the issue of a contractor default notice of voluntary termination with one contract months’ notice. Midlothian Schools Ltd This is a PPP contract for the provision and facilities management of Stobhill, Gorebridge, Tynewater, Moorfoot, Loanhead and St Margaret’s, Lawfield and Strathesk Primary Schools. When the agreement ends in 2037 the facilities will transfer to the Council in a usable condition as defined by the contract. The contractor does not have any right of renewal on contract expiry. Termination of contract is either at contract end date or following the issue of a contractor default notice of voluntary termination with six months’ notice. Newbattle Community Campus This is a 25-year Not for Profit Distributing Model (NPDM) contract with hubCo for the provision and lifecycle maintenance of the Campus. The facility opened in the financial year 2018/19 on 25th May 2018. Page 161 of 268
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Notes to the Accounts When the agreement ends in 2043 the facilities will transfer to the Council in a useable condition as defined by the contract. The contractor does not have any right of renewal on contract expiry. Termination of contract is either at contract end date or following the issue of a contractor default notice of voluntary termination with variable notice periods as defined in the contract. Food Waste Treatment Plant, Millerhill This is a 20- year Design, Build, Finance and Maintain (DBFM) contract which was jointly procured between Midlothian and the City of Edinburgh Council. At the end of the concession period in 2036 the asset will not revert back to the partner Councils and will remain under the full control of the DBFO operator, who has the option to continue to operate the asset from year 20 through to year 40, paying the market rent for the lease of the land over this period. At the end of the 40th year, the asset will be decommissioned and the decommissioned site transferred back to the ownership of the Councils. Termination of contract is either at contract end date or following the issue of a contractor default notice or voluntary termination with 40 days’ notice. Residual Waste Treatment Plant, Millerhill This is a 25- year DBFM contract which was jointly procured between Midlothian and the City of Edinburgh Council. At 1 April 2020, the contract was in the commissioning phase, with full service commencement achieved on 17 April 2019. The asset will be fully maintained throughout the life of the contract in accordance with the Partner Council’s requirements and will be inspected 18 months prior to the end of the contract (contract end date 6 May 2044) to ensure that it has been maintained. The asset will then be handed back to the Partner Councils in a condition that is commensurate with such maintenance. The contractor does not have any right of renewal on contract expiry. Termination of contract is either at contract end date or following the issue of a contractor default notice, the issue of a Partner Council Default notice, or voluntary termination by the Partner Councils with variable notice periods as defined in the contract. Property, Plant and Equipment The assets used to provide the services at the Dalkeith Schools Community Campus, the Primary Schools, the Newbattle Community Campus and the Millerhill Residual Waste Plant are recognised in the Council’s Balance Sheet under the Property, Plant and Equipment category in Note 14. Payments The council makes an agreed payment each year that is increased annually by inflation and can be reduced if the contractor fails to meet availability and performance standards in any year but which is otherwise fixed. There is also a donated asset account associated with the financing of the Millerhill Residual Waste asset. The recognition of donated asset income is on a flat line basis over the 25 years of the contract. Payments remaining to be made under these contracts at 31 March 2024 are as follows: Liability Interest Service Charge Total Dalkeith Schools Campus £000 £000 £000 £000 Within 1 Year 1,213 1,713 2,655 5,581 Within 2 to 5 Years 6,149 5,559 11,296 23,004 Within 6 to 10 Years 10,322 2,944 14,236 27,502 Total Remaining Contract 17,684 10,216 28,187 56,087 Page 162 of 268
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Notes to the Accounts Liability Interest Service Charge Total Midlothian Primary Schools £000 £000 £000 £000 Within 1 Year 1,148 1,821 2,639 5,608 Within 2 to 5 Years 5,489 6,385 11,233 23,107 Within 6 to 10 Years 9,436 5,406 15,695 30,537 Within 11 to 15 Years 8,897 1,530 12,260 22,687 Total Remaining Contract 24,970 15,142 41,827 81,939 Liability Interest Service Charge Total Newbattle Community Campus £000 £000 £000 £000 Within 1 Year 937 1,473 159 2,569 Within 2 to 5 Years 4,246 5,394 676 10,316 Within 6 to 10 Years 6,633 5,417 945 12,995 Within 11 to 15 Years 8,488 3,561 1,071 13,120 Within 16 to 20 Years 8,824 1,171 994 10,989 Total Remaining Contract 29,128 17,016 3,845 49,989 Donated Asset Liability Interest Service Charge Total Millerhill Residual Waste £000 £000 £000 £000 £000 Within 1 Year 572 50 923 1,308 2,853 Within 2 to 5 Years 2,293 201 3,597 5,628 11,719 Within 6 to 10 Years 2,866 522 4,215 7,775 15,378 Within 11 to 15 Years 2,867 1,242 3,445 8,735 16,289 Within 16 to 20 Years 2,867 2,829 1,731 9,891 17,318 Within 21 to 25 Years 578 69 1 224 872 Total Remaining Contract 12,043 4,913 13,912 33,561 64,429 Although the payments made to the contractor are described as unitary payments, they have been calculated to compensate the contractor for the fair value of the services they provide, the capital expenditure incurred and interest payable while the capital expenditure remains to be reimbursed. The liability outstanding to be paid to the contractors for capital expenditure incurred is as follows: 2022/23 2023/24 Liability Donated Asset Total Liability Donated Asset Total £000 £000 £000 Liabilities £000 £000 £000 82,729 13,187 95,916 Balance Outstanding at 1 April 79,819 12,613 92,432 (2,910) 0 (2,910) Payments during the year (3,120) 0 (3,120) 0 (574) (574) Other Movements 0 (574) (574) 79,819 12,613 92,432 Balance at 31 March 76,699 12,039 88,738 2022/23 £000 Included in the Balance Sheet 2023/24 £000 3,693 Current (Short-term Creditors) 3,920 88,739 Non-Current (Other Long-term Liability) 84,818 92,432 Balance at 31 March 88,738 Service Concession Arrangements (SCA’s) Midlothian Council has adopted the revised accounting arrangements under Local Government Finance Circular 10/2022 – Finance Leases and Service Concession Arrangements. The current repayment charges for each SCA have been compared against an annuity repayment profile based on the estimated useful asset lives. The calculation of the repayment charges of each SCAs or Public Page 163 of 268
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Notes to the Accounts Private Partnership (PPP) scheme using the asset life annuity basis is compared to the current charges which are made over the contract period and summarised as follows: Current Repayment £000 Revised Repayment £000 Total (reduction) / cost NPV Year £000 £000 Pre 2023/24 23,784 3,321 (20,463) (20,380) Yrs 2 to 5 13,939 2,303 (11,636) (10,293) Yrs 6 to 10 24,266 4,098 (20,167) (15,254) Yrs 11 to 25 41,610 28,799 (12,811) (9,756) Yrs 26 to 40 43,263 43,263 14,237 Yrs 41+ 21,815 21,814 4,863 Total Saving 103,599 103,599 0 (3,658) The total cumulative statutory adjustment up to the 31st March 2023 which would result from changing the calculation of the repayment of debt liability on the four SCAs using a 60-year, 50-year and a 26-year annuity period respectively is £20.463m. This is a one off in year reduction, compared to the current schedule of repayments. In the financial years up to the expiry date of each contract date(s) there would be further reductions. In the remaining years following the end of the SCAs, the rescheduled debt repayments continue until the debt liability has been extinguished. Over the full life of the SCAs the total repayment for the debt liability remains the same. However, when a Net Present Value (NPV) is applied the reprofiled charges would result in a total reduction in NPV terms of £36.583m. 34. Pension Schemes Accounted for as Defined Benefit Contribution Schemes Teachers employed by the Council are members of this Scottish Teachers Superannuation scheme, administered by the Scottish Government. The Scheme provides teachers with specified benefits upon their retirement, and the Council contributes towards the costs by making contributions based on a percentage of members’ pensionable salaries. The scheme is technically a defined benefit scheme. However, the scheme is unfunded and the Scottish Government uses a notional fund as the basis for calculating the employers’ contribution rate by local authorities. The Council is not able to identify its share of underlying financial position and performance of the scheme with sufficient reliability for accounting purposes. For the purposes of this Statement of Accounts, it is therefore accounted for on the same basis as a defined contribution scheme. In 2023/24 the Council paid £12.439 million (2022/23 £12.149 million) to the Scottish Government in respect of teachers’ pension costs. The rate of contribution was 23% for 2023/24 (2022/23 23%). The Council is responsible for the costs of any additional benefits awarded upon early retirement outside the terms of the teachers’ scheme. These costs are accounted for on defined benefit basis (detailed in note 35). The Council is not liable to the scheme for any other entities’ obligations under the plan. 35. Defined Benefit Pension Schemes As part of the terms and conditions of employment and its officers, the Council makes contributions towards the cost of post-employment benefits. Although these benefits will not actually be payable until Page 164 of 268
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Notes to the Accounts employees retire, the Council has a commitment to make the payments (for those benefits) and to disclose at the time that employees earn their future entitlement. The Council participates in the Local Government Pension (Scotland) Scheme. Employees other than teachers are eligible to join this scheme. The scheme is administered by City of Edinburgh Council through Lothian Pension Fund. This is a funded defined benefit final salary scheme, meaning the Council and employees pay contributions into a fund, calculated at a level intended to balance the pension’s liabilities with the investment assets. The principal risks to the Council of the scheme are the longevity assumptions, statutory changes to the scheme, and structural changes to the scheme (i.e. large-scale withdrawals from the scheme), changes to inflation, bond yields and the performance of equity investments held by the scheme. These are mitigated to a certain extent by the statutory requirements to charge the General Fund and Housing Revenue Account the amounts required by statute as described in the accounting policies note. Transactions Relating to Post-Employment Benefits The cost of retirement benefits in the reported cost of services is recognised when they are earned by employees, rather than when the benefits are eventually paid as pensions. However, the charge that is required to be made against council tax is based on cash payable in the year, so the real cost of post- employment/retirement benefits is reversed out of the General Fund and Housing Revenue Account via the Movement in Reserves Statement. The following transactions have been made in the Comprehensive Income and Expenditure Statement and the General Fund balance via the Movement in Reserves Statement during the year. 2022/23 2023/24 £000 Comprehensive Income and Expenditure Statement (CIES) £000 Cost of services: Service Cost Comprising: 37,435 • Current service cost 17,484 0 • Past service cost (including curtailments) 0 Financing and Investment Income and Expenditure: 1,712 • Net interest (income)/expense (9,031) 39,147 Total Post-employment Benefit Charged to the Surplus or Deficit on the Provision of Services 8,453 Other Post Employment Benefit charged to the Other Comprehensive Income & Expenditure Statement: Re-measurement of the Net Defined Benefit Asset Comprising: 3,555 • Return on plan assets (9,603) (299,055) • Actuarial (gains)/losses arising on changes in financial assumptions (19,560) (5,510) • Actuarial (gains)/losses arising on changes in demographic assumptions (11,007) 196,263 • Actuarial (gains)/losses arising on changes in the effect of limiting a net defined benefit asset to the asset ceiling (2,122) 37,973 • Other re-measurement experiences 53,665 (66,774) Total post-employment benefits charged to the Other Comprehensive Income & Expenditure Statement 11,373 (27,627) Total post-employment benefits charged to the CIES 19,826 2022/23 £000 Movement in Reserves Statement 2023/24 £000 (39,147) Reversal of net charges made to the surplus or deficit for the provision of services for post-employment benefits in accordance with the code (8,453) 18,733 Employers Contributions payable to the scheme 20,014 (20,414) Total Charged to the Movement in Reserves 11,561 Page 165 of 268
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Notes to the Accounts Pension Assets and Liabilities Recognised in the Balance Sheet Net Asset Restriction The actuary has calculated the Council’s IAS 19 defined benefit surplus for 2023/24 to be £186.529 million (2022/23 £188.463 million) as detailed in the tables below. IAS 19 states that when an entity has a surplus in the defined benefit plan it should measure the net defined benefit of the asset as the lower of: • The surplus in the defined benefit plan, and • The asset ceiling has been calculated by the actuary as the present value of any economic benefits available. Reductions in future contributions to the plan was used as the basis to determine the amount of the economic benefit as Midlothian Council has no unconditional right to a refund from the Fund and therefore there is no economic benefit available as a refund. For IFRIC 14 purposes, the actuary has calculated the net present value of the future contributions of £1.486 billion exceeds the value of the future service costs of £1.398 billion, a negative contribution of £87.793 million. As a result of this calculation IFRIC 14 advises that no defined benefit plan asset should be recognised in the Council’s Balance Sheet and there is no requirement to recognise the difference as a liability, however, is required to reflect the liability in relation to present value of unfunded obligations of £7.612 million. The amount included in the Balance Sheet arising from the Council’s obligation in respect of its defined benefit plans is as follows: 2022/23 2023/24 £000 Pensions Assets and Liabilities Recognised in the Balance Sheet £000 (510,236) Present value of the defined benefit obligation (550,295) 698,699 Fair value of Plan Assets 736,824 188,463 Net (liability)/asset arising from defined benefit obligation 186,529 (196,263) Restriction Adjustment under IFRIC 14 (194,141) (7,800) Revised Net (liability)/asset arising from defined benefit obligation (7,612) 2022/23 £000 Reconciliation of the present value of the scheme liabilities (defined benefit obligation) 2023/24 £000 731,499 Opening Balance at 1 April 510,236 37,435 Current service cost 17,484 20,075 Interest Cost 24,316 4,788 Contributions by Scheme Participants 5,105 Re-measurement (gains)/losses (299,055) • Changes in financial assumptions (19,560) (5,510) • Changes in demographic assumptions (11,007) 37,973 • Other 45,063 0 Past service cost (including curtailments) 0 (706) Estimated Unfunded Benefits Paid (751) (16,263) Estimated Benefits Paid (20,591) 510,236 Closing Balance at 31 March 550,295 Page 166 of 268
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Notes to the Accounts 2022/23 2023/24 £000 Reconciliation of the movements in the fair value of scheme assets £000 677,339 Opening fair value of scheme assets 698,699 18,363 Interest Income 33,347 Re-measurement gains/(losses): (3,555) • Return on assets excluding amounts included in net interest 9,603 0 • Other (8,602) 18,027 Contributions from Employer 19,263 4,788 Contributions from employees into the scheme 5,105 (16,263) Benefits Paid (20,591) 706 Contributions in respect of Unfunded Benefits 751 (706) Unfunded Benefits Paid (751) 698,699 Closing Balance at 31 March 736,824 Local Government legislation provides that Local Authorities have an obligation to meet their share of the expenditure of the Joint Boards of which they are constituent members. At 31 March 2024, the asset for Pensions sits at £22.809 million (2022/23 £6.250 million). As a consequence the Council has additional assets arising from the pension surplus of the Lothian Valuation Joint Board. Basis for Estimating Assets and Liabilities Liabilities have been assessed on an actuarial basis using the projected unit credit method, an estimate of the pensions that will be payable in future years are dependent on assumptions about mortality rates, salary levels etc. The Local Government Pension Scheme liabilities have been estimated by Hymans Robertson LLP, an independent firm of actuaries and estimates for the pension fund are based on the latest full valuation of the scheme as at 31 March 2024. The significant assumptions used by the actuary have been: 2022/23 Mortality Assumptions 2023/24 Longevity at 65 for Current Pensioners: 19.9 - Men (Years) 20.1 22.9 - Women (Years) 23 Longevity at 65 for Future Pensioners: 21.2 - Men (Years) 20.9 24.7 - Women (Years) 24.6 Financial Assumptions 2.95% Rate of Inflation/increase in pensions 2.8% 3.45% Rate of increase in salaries 3.5% 4.75% Rate for discounting scheme liabilities 4.8% 2.2% Actual Rate of Investment Returns 6.1% The estimation of the defined benefit obligations is sensitive to the actuarial assumptions set out in the table above. The sensitivity analysis below have been determined based on possible changes of the assumptions occurring at the end of the reporting period and assumes for each change that the assumption analysed changes while all the other assumptions remain constant. The estimations in the sensitivity analysis have followed the accounting policies for the scheme, i.e. on an actuarial basis using the projected unit credit method. The methods and types of assumptions used in preparing the sensitivity analysis below did not change from those used in the previous period. Page 167 of 268
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Notes to the Accounts Pension Sensitivities at 31 March 24 Approximate % increase to the Employer Obligation Approximate monetary amount £000 0.1% decrease Real Discount Rate 2% 10,197 1 year increase in member life expectancy 4% 22,012 0.1% increase in the Salary Increase Rate 0% 579 0.1 % increase in the Pension Increase Rate (CPI) 2% 9,792 Local Government Pension Schemes Comprised Page 168 of 268
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Notes to the Accounts 2022/23 2023/24 Fair Value of Scheme Assets Percentage of Total Assets Quoted prices in active markets Quoted prices not in active markets Total Fair Value of Scheme Assets Percentage of Total Assets £000 Pension Fund Assets £000 £000 £000 32,999 5% Cash and Cash Equivalents 27,363 0 27,363 4% Equity Instruments: 85,663 12% Consumer 87,027 0 87,027 12% 96,314 14% Manufacturing 101,191 0 101,191 14% 42,148 6% Energy and Utilities 40,028 0 40,028 5% 42,030 6% Financial Institutions 43,382 0 43,382 6% 51,322 7% Health and Care 47,614 0 47,614 6% 29,018 4% Information Technology 36,530 0 36,530 5% 47,709 7% Other 45,196 0 45,196 6% 394,204 56% Sub-total Equity 400,968 0 400,968 54% Bonds: 10,897 2% Corporate 11,893 0 11,893 2% 81,001 12% Government 99,052 0 99,052 13% 14,592 2% Other 12,757 0 12,757 2% 106,490 16% Sub-total bonds 123,702 0 123,702 17% Property: 31,474 5% UK 0 37,652 37,652 5% 1,122 0% Overseas 2,494 7 2,501 0% 32,596 5% Sub-total Property 2,494 37,659 40,153 5% Investment Trusts and Unit Trusts: 9,843 1% Equities 0 0 0 0% 0 0% Commodities 0 8,165 8,165 1% 20,230 3% Bonds 0 18,742 18,742 3% 99,578 14% Infrastructure 1,667 109,414 111,081 15% 129,651 18% Sub-total Trusts 1,667 136,321 137,988 19% 2,729 0% Private Equity (all) 3,767 3,000 6,767 1% 30 0% Derivatives: Forward Foreign Exchange Contracts (117) 0 (117) 0% 698,699 100% Total Assets 559,844 176,980 736,824 100% Impact on the Council’s Cash Flows The objectives of the scheme are to keep employers’ contributions at as constant a rate as possible. The fund has agreed a strategy with the scheme’s actuary to achieve a funding level of 100% of the overall liabilities of the fund in the longer term. Funding levels are monitored on an annual basis. The next triennial valuation will be performed at 31 March 2026, with results being published by 31 March 2027 and will impact contribution rates from 1 April 2027. The Council anticipates to pay £14.937 million in contributions to the scheme to 31 March 2025. The weighted average duration of the defined benefit obligation scheme members is 17 years for 2023/24 (20 years 2022/23). 36. Contingent Liabilities The assimilation of the stand-alone Lothian Buses Pension Fund into the general Lothian Pension Fund required all four Council shareholders in Lothian Buses Limited to enter into a deed of guarantee and function as guarantors for Lothian Buses Limited contributions to the general fund. Previously, whilst there was no formal guarantee in place for the stand alone Lothian Buses Fund, in the event of a default then the City of Edinburgh Council (as administering authority) would have looked to the four Council shareholders to make good any liability. Page 169 of 268
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Notes to the Accounts 37. Trusts, Bequests, Common Good and Community Funds There are some 15 active trusts, bequest and community funds of varying size managed by the Council, each of which has specific objectives and conditions. None of the funds are currently registered charities. The main funds are: 2022/23 £000 Trusts, Bequests, Common Good and Community Funds 2023/24 £000 8 Dalkeith Common Good Fund 8 2 Penicuik Common Good Fund 2 51 Community Mining Funds 52 101 Other Funds 108 162 Total 170 A total £0.108 million (2022/23 £0.100 million) has been committed to be spent from these funds. The funds do not represent assets of the Council and are included in the Balance Sheet as creditors except the Community Mining Funds that are held in separate bank accounts. 38. Notes to the Group Accounts The Code of Practice on Local Council Accounting in the United Kingdom 2023/24 (The Code) applies to Local Authorities or similar bodies defined in section 106 of the Local Government (Scotland) Act 1973 e.g. statutory bodies such as Integration Joint Boards and Valuation Boards. Authorities are required to prepare a full set of group accounts in addition to their own Council’s accounts where they have a material interest in such entities. The Group Accounts of Midlothian Council are prepared in accordance with the accounting policies of the Council with the additions and exceptions shown below. The Group Accounts consolidate the results of the Council with other entities. These organisations are entirely independent of the Council under law and for taxation. Valuation of Property, Plant and Equipment The basis of valuation across the combining entities is in accordance with the Code and there are no material inconsistencies with the policies adopted by Midlothian Council. The Integration Joint Board has no Property, Plant or Equipment. Depreciation The basis of valuation across the combining entities is in accordance with the Code and there are no material inconsistences with the policies adopted by Midlothian Council. Goodwill The Council has acquired its share of the net assets of its associates for nil consideration and no goodwill has been included in the Group Balance Sheet. Basis of Consolidation Subsidiaries are consolidated on a line-by-line basis. All other entities are accounted for under the accounting conventions of the “acquisition basis” using the equity method – the Council’s share of the entities results and its share of other gains and losses (recognised in the Group CIES). With the exception Page 170 of 268
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Notes to the Accounts of Midlothian Energy Ltd, whose reporting date is 31 December, all entities have the same reporting date as the Council. Restrictions of the Transfer of Funds The Council’s share of the reserves of its associate and joint ventures is unusable i.e. it cannot be used to fund the Council’s services to reduce taxation. Further details for each entity are as follows: Entity Percentage Share in Entity Share of Assets £000 Share of Liabilities £000 Net Share of Assets £000 Share of Revenues £000 Share of (Profit)/Loss £000 Subsidiaries: Trusts, Bequests, Common Good and Community Funds 100 170 (170) 0 8 (8) Pacific Shelf 826 Ltd 100 0 (58) (58) 0 5 170 (228) (58) 8 (3) Associates: Lothian Valuation Joint Board 9 350 (392) (42) (1,476) 69 Joint Ventures: Midlothian Integration Joint Board 50 400 0 400 (93,292) 6,179 Midlothian Energy Ltd 50 6,875 (2,644) 4,231 (4) (4) Total Joint Ventures & Associates 7,625 (3,036) 4,589 (94,772) 6,244 Total for Group 7,795 (3,264) 4,531 (94,780) 6,241 The information above agrees to the group accounts after the elimination of inter-company transactions. Combining Entities The following table provided further details about the entities incorporated into the Council’s Group Accounts: Group Entities Nature of Body Accounts Available From Subsidiaries: Trusts, Bequests, Common Good and Community Funds To award grants across Midlothian. Midlothian Council, Midlothian House, Buccleuch Street, Dalkeith Pacific Shelf 826 Ltd Property Development. Midlothian Council, Midlothian House, Buccleuch Street, Dalkeith Associates: Lothian Joint Valuation Board Maintains the electoral, council tax and non-domestic rates registers for the Edinburgh, Midlothian, West Lothian and East Lothian Councils. The Treasurer, Lothian Joint Valuation Board, Edinburgh Council, Waverly Court, Edinburgh Joint Ventures: Midlothian Integration Joint Board Its purpose is to improve the well-being of families, our communities and of people who use health and social care services. The Integration Scheme determines when the Council will have shared responsibility for additional funding with NHS Lothian and is linked to demographic shifts and demand volumes linked to service delivery. Midlothian Council, Midlothian House, Buccleuch Street, Dalkeith Midlothian Energy Limited Energy generation, distribution and supply. Midlothian Council, Midlothian House, Buccleuch Street, Dalkeith Page 171 of 268
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Notes to the Accounts Non-Material Interests in Other Entities In addition to the organisations outlined above, the Council also has an interest in Seemis Group LLP who provide Scottish Local Authorities with an Education Management System. Midlothian have a 1.90% interest in Seemis. Page 172 of 268
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Supplementary Statements Supplementary Statements Housing Revenue Account The HRA Income and Expenditure Statement shows the economic cost in the year of providing housing services in accordance with generally accepted accounting practices, rather than the amount to be funded from rents and government grants. The Council charge rents to cover expenditure in accordance with the legislative framework; this may be different from the accounting cost. The increase or decrease in the year, on the basis which rents are raised, is shown in the movement on the Housing Revenue Account Statement. 2022/23 2023/24 £000 HRA Income and Expenditure Statement £000 £000 Expenditure: 7,531 Repairs and Maintenance 8,739 4,948 Supervision and Management 5,427 30,157 Depreciation, impairment and revaluation non-current assets 55,608 270 Movement in the allowance for bad debtors 670 2,270 Other Expenditure 2,396 45,176 Total Expenditure 72,840 Income: (30,130) Dwelling Rents (31,372) (335) Non-dwelling Rents (342) (364) Service Charge Income (155) (34) Other Income (91) (30,863) Total Income (31,960) 14,313 Net Expenditure or (Income) of HRA services as included in the Comprehensive Income and Expenditure Statement 40,880 311 HRA Share of Corporate and Democratic Core 332 14,624 Net (Income)/expenditure for HRA Services 41,212 HRA share of the operating income and expenditure included in the whole authority Comprehensive Income and Expenditure Statement: 0 (Gain) or Loss on sale of HRA non-current assets 0 6,373 Interest payable and similar charges 8,588 (548) Interest and investment income (1,534) 10 Net interest on the net defined liability benefit liability (asset) (55) 5,835 6,999 20,459 (Surplus)/Deficit for the year on HRA Services 48,211 Page 173 of 268
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Supplementary Statements Movement in the Housing Revenue Account 2022/23 2023/24 £000 Movement on the HRA Statement £000 £000 (28,084) Balance on the HRA at the end of the previous reporting period (32,143) 20,459 (Surplus) or deficit for the year on the HRA Income and Expenditure Statement 48,211 Adjustments between accounting basis and funding basis under statute: (30,156) Depreciation, impairment and revaluation non-current assets (55,608) 0 Gain or (Loss) on sale of HRA non-current assets 0 3,693 Loans Fund Principal 4,221 (124) Net charges made for retirement benefits in accordance with IAS 19 66 (26,587) Total Adjustments between accounting basis and funding basis under statute (51,321) 2,069 Transfer to General Fund Reserve 2,071 (4,059) (Increase) or Decrease in year on the HRA (1,039) (32,143) Balance on the HRA at the end of the current reporting period (33,182) Notes to the Housing Revenue Account Housing Stock The number of council dwellings for the year can be analysed as follows: 2022/23 Housing Stock 2023/24 1,003 1 Bedroom 1,083 4,011 2 Bedroom 4,128 1,923 3 Bedroom 1,975 323 4 Bedroom 332 11 5/6 Bedroom 11 7,271 Total Housing Stock at 31 March 7,529 This represents an increase in the year of 258 units (2022/23 9), which is represented in the table below: 2022/23 Increase/(decrease) in Housing Stock 2023/24 0 New Build Completions 233 28 Open Market Purchases 27 (18) Re-purposed units for temporary accommodation (2) (1) Demolition/Disposal 0 9 Net increase in Housing Stock at 31 March 258 Other Information 2022/23 2023/24 £000 Other Information £000 5,490 Total Rent Arrears 6,979 2,710 Bad Debt Provision 3,380 896 Void Rent Loss (netted against rental income) 949 Page 174 of 268
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Supplementary Statements Council Tax Income Account The Council Tax Income Account (Scotland) shows the gross income raised from Council Taxes levied and deductions made under statute. The resultant net income is transferred to the Comprehensive Income and Expenditure Statement of the Council. Local Authorities raise taxes from its residents through Council Tax, which is based on property values. Each dwelling in a local Council area is placed into one of eight valuation bands, A to H. The Council declares a tax for Band D properties and all other properties are charged a proportion of this, lower valued properties (Bands A to C) pay less; higher valued properties (Bands D to F) pay more. 2022/23 2023/24 £000 Council Tax Income Account £000 67,229 Gross Council Tax levied and Contributions in Lieu 72,406 Less: (5,265) Council Tax Reduction Scheme (5,671) (6,746) Other Discounts and Reductions (6,942) (2,106) Write-off of Uncollectable Debts and Allowances for impairment (2,443) 204 Prior year adjustments (44) 53,316 Net Council Tax Income transferred to General Fund 57,306 Midlothian Council Tax Charge and Properties by Band 2022/23 2022/23 2023/24 2023/24 Property Numbers £ per Property Band Property Numbers £ per Property 1 801 A - Disabled 1 842 541 962 A 603 1,010 8,016 1,122 B 8,532 1,178 8,376 1,282 C 8,741 1,346 5,044 1,443 D 5,231 1,515 4,892 1,895 E 5,056 1,990 4,218 2,344 F 4,397 2,461 2,706 2,825 G 2,896 2,966 174 3,534 H 178 3,711 33,968 35,635 Page 175 of 268
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Supplementary Statements Calculation of Council Tax Base (shown as numbers of properties) 2023/24 A (Disabled) A B C D E F G H Total No of Properties Number of Properties 0 986 12,751 11,316 5,997 5,665 4,655 3,026 186 44,582 Properties subject to Empty Homes Premium 0 12 69 56 45 29 20 17 5 253 Properties subject to Disabled Relief 2 38 37 (46) 12 1 (12) (29) (3) 0 Less: Exempt Properties 0 75 448 259 92 180 53 23 5 1,135 Properties Entitled to 25% Discounts 0 143 1,480 968 449 316 156 76 5 3,593 Properties Entitled to 50% Discounts 0 0 5 5 1 3 2 1 0 17 Properties Entitled to Other Discounts 0 2 33 20 7 5 2 1 0 70 Reduction in Tax Base due to Council Tax Reduction 1 213 2,359 1,333 274 135 53 17 0 4,385 Total Equivalent Properties 2023/24 1 603 8,532 8,741 5,231 5,056 4,397 2,896 178 35,635 Ratio to Band D 0.56 0.67 0.78 0.89 1 1.31 1.63 1.96 2.45 Band D Equivalent Properties 0 402 6,636 7,770 5,231 6,643 7,145 5,671 437 39,935 Contributions in Lieu - Band D Equivalents 199 Sub-total 40,134 Less Bad Debt Provision at 3.75% (1,613) Total Council Tax Base 38,521 2022/23 A (Disabled) A B C D E F G H Total No of Properties Band D Equivalent Properties 0 361 6,234 7,446 5,044 6,428 6,855 5,299 427 38,094 Contributions in Lieu - Band D Equivalents 198 Sub-total 38,292 Less Bad Debt Provision at 3.5% (1,460) Total Council Tax Base 36,832 Page 176 of 268
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Supplementary Statements Non-Domestic Rate Account (NDR) The Non-domestic Rate Account (Scotland) is a statement that reflects the statutory obligation for billing authorities to maintain a separate non-domestic rate account. The statement shows the gross income from the rates and deductions made under statute. The net income is paid to the Scottish Government as a contribution to the national non-domestic rate pool. 2022/23 2023/24 £000 Non-Domestic Rate Income Account £000 44,743 Gross Council Tax levied and Contributions in Lieu 47,637 Less: (10,682) Reliefs and other deductions (10,790) (784) Write-off of Uncollectable Debts and Allowances for impairment (938) 33,277 Net Non-Domestic Rates Income 35,909 (4,671) Prior year adjustments (711) 0 Non-domestic rates income retained by the council (BRIS) 0 28,606 Contribution to Non-Domestic Rate Pool 35,198 Allocated: 28,688 Contribution to non-domestic rate pool 35,954 (82) Council Rate Income - non-pool (756) 28,606 35,198 24,895 Amount distributed to Midlothian Council from non-domestic rate pool 35,215 The Business Rate Incentivisation Scheme (BRIS) permits the Council to retain 50 percent share of the Non- domestic rates income, which exceeds the income target set by Scottish Government. Net Rateable Value Calculation Occupiers of non-domestic property pay rate based on the valuation of the property within the valuation roll for Midlothian. The NNDR poundage is determined by the Scottish Government and was 49.8p (2022/23 49.8p) per £, where the rateable value was less than £51,000 (2022/23 £51,000), 51.1p where the rateable value is between £51,000 and £100,000 (2022/23 51.1p between £51,000 and £95,000,) and 52.4p per £ where the rateable value exceeded £100,000 (2022/23 52.4p greater than £95,000). 2022/23 2022/23 2023/24 2023/24 Numbers £000 Analysis of Rateable Values and Number of Premises Numbers £000 1,828 49,279 Shops, Offices and Other Commercial Subjects 1,831 49,831 954 19,777 Industrial and Freight Transport 973 19,913 303 22,931 Miscellaneous (Schools, etc.) 304 23,379 3,085 91,987 Total 3,108 93,123 Page 177 of 268
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Glossary of Terms Glossary of Terms While much of the terminology used in this report is intended to be self-explanatory, the following additional definitions and interpretation of terms may be of assistance. Actuarial Gains and Losses (Pension) For a defined benefit scheme, the changes in actuarial deficits or surpluses that arise because events have not coincided with the actuarial assumptions made for the last valuation (experience gains and losses) or the actuarial assumptions have changed. Amortisation Amortisation is the cost of reducing the value of an intangible asset over its useful economic life. A charge is made against services for the value of the assets they have used during the year. Assets An asset is any item that has value including cash, investments, properties, vehicles, etc. Assets are classified as current, which will be consumed within the current year, or non-current, which will be used to provide services over more than one year. Associate An entity other than a subsidiary or joint venture in which the reporting Council has a participating interest and over whose operating and financial policies, the reporting Council is able to exercise significant influence. Capital Expenditure This is expenditure incurred in creating, acquiring or improving assets where the expenditure is normally financed by borrowing with repayment over a period of years, or by using the income from the sale of existing assets. Capital Financed from Current Revenue This heading covers the costs of creating, acquiring or improving assets where the expenditure is charged directly to the Revenue Account. Corporate and Democratic Core Corporate and Democratic Core costs include the costs of policymaking and all other Councillor based activities together with costs that relate to the general running of the Council. The Best Value Accounting Code of Practice stipulates that such costs are to be excluded from the “total cost” relating to service activity. Community Assets Long-term assets that have no determinable useful economic life and are held in perpetuity by the Council, including parks and open spaces. Creditors Creditors are a kind of liability. They represent payments owed by the Council to another person or organisation for past events. Page 178 of 268
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Glossary of Terms Debtors Debtors are a kind of asset. They represent payments owed to the Council by another person or organisation for past events. Defined Benefit Pension Scheme A Defined Benefit Pension Scheme is a scheme where the benefits due to participants are predetermined based on earnings, length of service and age and are not directly dependant on the contributions paid or investment returns realised. Depreciation Depreciation is the measure of the cost of wearing out, consuming or reducing the useful life of the Council’s assets. A charge is made against services for the value of the assets they have used during the year. Entity A body corporate, partnership, trust, unincorporated association, or statutory body that is delivering a service, or carrying on a trade or business, with or without a view to profit. It should have a separate legal personality and is legally required to prepare its own single-entity accounts. Fair Value The fair value of an asset or liability is the price at which it could be exchanged or settled in an arm’s length transaction between two willing, knowledgeable parties. Financial Instrument A financial instrument is any contract, which gives rise to a financial asset or liability or an equity instrument in another entity, this includes cash, debtors, creditors, loans, borrowings and shares in other companies. Infrastructure Assets Non-current assets that cannot be transferred or sold, including roads, bridges and footpaths. Inventories Inventories are raw materials or goods which have been purchased but which have not yet been consumed in the delivery of Council services. Liabilities A liability represents a payment owed to another person or organisation including loans, outstanding invoices, provisions, contributions owed to third parties, etc. Short-term liabilities are due to be paid within the current year. Long-term liabilities are amounts that will not be paid until a later year. Non-Distributable Costs Non Distributable Costs represent costs that cannot be allocated to specific services and again, under the Best Value Accounting Code of Practice, are excluded from the total cost relating to service activity. Examples of Non Distributable Costs are charges for added pension years and early retirement. Other Costs This heading covers items of expenditure that cannot be accommodated in any of the other categories. Page 179 of 268
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Glossary of Terms Provisions A provision is a kind of liability. Where a payment for a liability is certain or highly likely to occur but the exact amount and timing is not known, an amount must be put aside to meet the estimated future costs. Revaluation / Impairment Revaluations and impairments are adjustments to the value of an asset, either positively or negatively, to align the carrying value of an asset to an independent assessment of the asset’s fair value. Revenue Expenditure Revenue expenditure includes the day-to-day costs of providing services including salaries and wages, property costs, transport costs, supplies, and services. It also includes the costs of the repayment of loans used to finance capital expenditure. Page 180 of 268
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Audit Committee Monday 25 November 2024 Item No 5.3 Treasury Management Mid-Year Review Report 2024/25 Report by David Gladwin, Chief Financial Officer & Section 95 Officer Report for Consideration 1 Recommendations The Audit Committee is invited to comment on this report before it is presented to Council. In particular, Audit Committee should note the following recommendations which are proposed to be put to Council on 17 December 2024: - a) Note the report and the treasury activity undertaken in the period to 30 September 2024, as outlined in Section 5; b) Note the current economic position and forecast for interest rates, and the actual and forecast Treasury Management activity during the second-half of the year, as outlined in Section 6; and in particular, given the clear differential that now exists between borrowing rates and fixed term deposit rates, the adoption of a strategy towards running down cash (fixed term deposit) balances to allow the Council to continue to defer costs associated with locking into longer-term borrowing at rates that are currently higher than normal, noting that this is similar to the majority of other Scottish Councils; c) Note the technical revisions to the Prudential Indicators in Section 7 of this report. d) Note the loans fund rate performance relative to other Scottish Local authorities, as outlined in Section 8, and the cash saving (compared to the Scottish Average) that the Treasury Management function brings to support the Council’s in-year revenue budget. 2 Purpose of Report/Executive Summary The purpose of this report is to inform members of the Audit Committee, and subsequently Council, of the Treasury Management activity undertaken during the first half of 2024/25 and the forecast activity for the second half of 2024/25 in accordance with the Treasury Management and Annual Investment Strategy approved by Council on 27 February 2024. It also provides an update to the Treasury and Prudential Indicators for 2024/25. Date: 14 November 2024 Report Contact: Gary Thomson, Senior Finance Business Partner gary.thomson@midlothian.gov.uk Page 181 of 268
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2 3 Background Audit Committee Role The Prudential Code recommends that the main Treasury Management reports are presented for scrutiny by Audit Committee in advance of consideration by Council. This report is being presented to Audit Committee on 25 November 2024 for consideration prior to being presented to Council on 17 December 2024. Any revisions arising from Audit Committee consideration of the report on 25 November 2024 will be incorporated into the final version of the report to Council on 17 December 2024. Treasury management Treasury management is defined in the Prudential Code as: “The management of the local authority’s borrowing, investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.” The main function of the treasury management service is the funding of the Council’s capital investment plans. These capital plans provide a guide to the borrowing need of the Council, essentially the longer-term cash flow planning to ensure the Council can meet its capital spending operations. The management of this long-term borrowing requirement involves arranging long or short-term loans or using cash balances; and on occasion any debt previously drawn may be restructured to meet Council risk or cost objectives. As the Council operates a balanced budget, this broadly means cash raised during the year will meet its cash expenditure. As part of the treasury management operations, officers ensure this cash flow is adequately planned, with available cash balances being deposited in low-risk counterparties, providing adequate liquidity initially before considering optimising return on deposits. This mid-year report has been prepared in compliance with CIPFA’s Code of Practice on Treasury Management, and covers the following: • An economic update for the first half of the 2024/25 financial year; • A review of the Treasury Management Strategy Statement and Annual Investment Strategy 2024/25 (TM&AIS 2024/25) approved by Council on 27 February 2024; • The Council’s capital expenditure, as set out in the General Services and HRA Capital Plan reports, and prudential indicators; • A review of the Council’s borrowing strategy for 2024/25; • A review of the Council’s deposit portfolio for 2024/25; • A review of any debt rescheduling undertaken during 2024/25; • A review of compliance with Treasury and Prudential Limits for 2024/25. Page 182 of 268
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3 4 Economic update for first half of 2024/25 An economic update for the first part of the 2024/25 financial year is included as Appendix 1. PWLB borrowing rates for the first half of the year are outlined in Appendix 2, and Bank Rate / SONIA rates for the first half of the year are outlined in Appendix 3. 5 Treasury Activity during first half of 2024/25 The main points arising from treasury activity in the 6 months to 30 September 2024 were:- • Long term borrowing of £20.000 million was secured on 13 August 2024, this being two £10 million PWLB Maturity loans with tenors of 4 and 5 years respectively and at interest rates of 4.15% and 4.13% respectively. • Long term borrowing of £1.060 million matured, this being £0.626m of PWLB Maturities, £0.336 million of Market Loans, £0.070 million of Salix loans and £0.028 million PWLB Annuities; • Funds on fixed term deposit of £10.000 million matured in September 2024; • The average interest rate earned on external funds on deposit in the first half of the year was 5.12%. Loan Portfolio The Council’s loan portfolio as at 30 September 2024 is shown in table 1 below (position at 31 March 2024 also shown for comparison):- Table 1: Council’s Loan Portfolio at 31 March 2024 and 30 September 2024. Loan Type 31 March 2024 30 September 2024 Principal Outstanding £000’s Weighted Average Rate Principal Outstanding £000’s Weighted Average Rate % PWLB Annuity 452 8.91% 424 8.91% PWLB Maturity 304,128 3.01% 323,502 3.07% LOBO 20,000 4.51% 20,000 4.51% Market Loans 16,221 2.68% 15,886 2.68% Other Loans 70 0.00% 0 n/a Total Loans 340,871 3.09% 359,812 3.14% Underlying Borrowing Requirement* 401,845 427,696 Over/(Under) Borrowing -60,974 -67,884 Page 183 of 268
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4 * The Underlying Borrowing Requirement is the Capital Financing Requirement excluding the “Public Private Finance” (PPP) Contract Liabilities The balance of external and internal borrowing is generally driven by market conditions. At 30 September 2024 the Council was under borrowed by £67.884 million – this is the extent to which the Council has yet to finance its current borrowing requirement from long term loans. This position reflects the Council’s use of working capital and balance sheet useable reserves to fund part of the prior year and current in-year borrowing requirement. This strategy of using internal borrowing (working capital) to fund the in- year CFR is prudent given the current plateau in medium to longer-term PWLB borrowing rates of c. 5.00%+, and the expected gradual drop in these medium to longer-term PWLB borrowing rates over the remainder of the current and forthcoming financial years as outlined in Appendix 4. Debt Rescheduling No Debt Rescheduling has taken place to date in the financial year. However, debt repayment and rescheduling opportunities have increased in the past 6 months given that the whole of the yield curve has shifted and remains higher; and there may be opportunities for debt rescheduling in the future. See Section 6 below for more detail. Funds on Deposit The Council’s funds on deposit portfolio as at 30 September 2024 is shown in table 2 below (position at 31 March 2024 also shown for comparison):- Table 2: Council’s Funds on Deposit Portfolio at 31 March 2024 and 30 September 2024 Type 31 March 2024 30 September 2024 Principal Outstanding £000’s Weighted Average Rate Principal Outstanding £000’s Weighted Average Rate % Money Market Funds 25,100 5.29% 27,042 5.01% Bank Call Accounts 1,519 5.14% 2,508 4.88% Bank Fixed Term Deposits 30,000 5.12% 20,000 5.06% Total Deposits 56,619 5.20% 49,550 5.02% Page 184 of 268
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5 The Chief Financial Officer & Section 95 Officer confirms that the approved limits within the Annual Investment Strategy were not breached during the first 6 months of 2024/25. 6 Actual/Expected Treasury Activity during second half of 2024/25 6.1 Economic Update The Council has appointed Link Treasury Solutions Limited as its treasury advisors and part of their service is to assist the Council to formulate a view on interest rates. Following the 30 October UK Government Budget, the outcome of the US Presidential election on 6 November, and the 25bps Bank Rate cut undertaken by the Monetary Policy Committee (MPC) on 7 November, Link, on 11 November 2024, have significantly revised their central forecasts for the Bank of England Base Rate, 3-12 month deposit rate earnings, and PWLB certainty rates. These are outlined in Table 3 below. Table 3: Link Treasury Solutions Limited Central Forecast for Interest Rates In summary, Bank Rate is now forecast to be 50bps – 75bps higher than was previously the case, whilst PWLB forecasts have been materially lifted to not only reflect increased concerns around the future path of inflation, but also the increased level of government borrowing over the term of the current Parliament. Reflecting on the 30 October UK Government Budget, Link’s central case is that those policy announcements will be inflationary, at least in the near-term. The Office for Budgetary Responsibility and the Bank of England concur with that view. Link forecast the next reduction in Bank Rate to be made in February and for a pattern to evolve whereby rate cuts are made quarterly and in keeping with the release of the Bank’s Quarterly Monetary Policy Reports (February, May, August and November). Any movement below a 4% Bank Rate will, nonetheless, be very much dependent on inflation data in the second half of 2025. The fact that the November MPC rate cut decision saw a split vote of 8-1 confirms that Page 185 of 268
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6 there are already some concerns around inflation’s stickiness, and with recent public sector wage increases beginning to funnel their way into headline average earnings data, the market will be looking very closely at those releases. Link forecast that the short to medium part of the PWLB curve is forecast to remain elevated over the course of the next year, and the degree to which rates moderate will be tied to the arguments for further Bank Rate loosening or otherwise. The longer part of the curve will also be impacted by inflation factors, but there is also the additional concern that with other major developed economies such as the US and France looking to run large budget deficits there could be a glut of government debt issuance that investors will only agree to digest if the interest rates paid provide sufficient reward for that scenario. 6.2 Expected Treasury Activity in Second Half of 2024/25 The expected activity in the second half of 2024/25, as outlined below, updates the treasury management position in light of the updated economic position as outlined in Section 6.1 above, and the General Services and HRA Capital Plans as presented to Councils at Quarter 1 Monitoring (27 August 2024) and Quarter 2 Monitoring (12 November 2024). Borrowing Long term borrowing of £0.367 million will mature in the second half of 2024/25, this being £0.338 million of Market Loans and £0.029 million PWLB Annuities. Proactive Treasury Management by the Council in the last decade has placed the Council in a strong refinancing position for its existing external debt portfolio, with just 12.22% (£43.953m) of the Council’s total Loan Portfolio of £359.812 million requiring refinancing over the remainder of the current, and forthcoming four, financial years, as shown in Table 4 below. Table 4: Maturity Profile of Existing External Loan Portfolio Financial Year 2024/25 Remaining £000’s 2025/26 £000’s 2026/27- 2029/30 £000’s 2030/31- 2034/35 £000’s 2035/36- 2044/45 £000’s 2045/46+ £000’s Debt Maturing 367 1,263 42,323 45,106 32,365 238,388 % of total portfolio 0.10% 0.35% 11.76% 12.54% 9.00% 66.25% The majority of this (£40m) matures in the latter half of this decade (March 2027+) where borrowing in the last 12 months to fund the Council’s in-year Capital Financing Requirements has been sourced in line with the approved TMIS – specifically, to borrow from PWLB for a relatively shorter term (3-5 years), to navigate past the current interest Page 186 of 268
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7 rate hump, with gilt yields expected to ease throughout the course of the next 12-36 months. This relatively low short-term exposure to refinancing risk puts the Council in a strong position to plan its borrowings in advance, take advantage of any dips in longer-term borrowing rates from PWLB and other sources, and maintain a low weighted average coupon rate on external debt. As noted in Section 6.1, the current PWLB yield curve remains fully above 5.00% (certainty rate) and is bell shaped with a peak in rates around the 20-30 year tenor (5.50%), with 5-10 year rates at c. 5.00- 5.30% and 50 year rates are c. 5.30%. The yield curve is expected to remain bell shaped over the short-medium term, with:- • a gradual shift downwards of the entire curve by c. 40-50bps over the next 12 months and • a further 30-40bps drop over the subsequent 12 months. As noted in Table 3 in Section 6.1, this is forecast to bring longer-term borrowing rates down to between 4.50%-5.00% by December 2025, and between 4.20%-4.60% by December 2026. This is a shallower drop than previously expected, meaning long-term borrowing rates remain higher and stickier for longer. The funding of the Council’s in-year and forward CFR is typically for infrastructure with long asset lives (50-60 years), and the tenor of PWLB and market loans are typically drawn with this in mind. Consideration for any new borrowing in the remainder of the 2024/25 financial year, to fund the Council’s in-year CFR, will seek to balance:- a) the security/certainty of current relatively high longer-term borrowing rates of upwards of 5.40%% in the 30-50 year duration (which are forecast to drop by 40bps within one year and 80bps within 24 months) and the potential additional budgetary pressure that this brings in both the short/medium and longer term; with b) the option to borrow initially for a shorter-term duration from PWLB or other markets, for 2 to 5 years (at say c. 4.90%), to allow the Council to fund the immediate in-year borrowing requirement. Based on current interest rate forecasts (see Appendix 4), this would then allow the Council the option to refinance this borrowing at initial maturity with less expensive, longer term borrowing, e.g. a 45 to 48 year tenor in, say, 36 months at a forecast rate of c. 4.30%. As noted above, the Council’s proactive Treasury Management over the last decade has put the Council in a strong refinancing position for its external debt portfolio which allows the Council to slot in shorter dated Page 187 of 268
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8 external borrowing into the current debt maturity profile to fund the in- year borrowing required, in order to navigate past the current expected hump in longer-term borrowing rates. It is expected that any further long-term borrowing that is undertaken in 2024/25 to finance the current & future year capital plans will be sourced by drawing new PWLB loans at the Certainty Rate (which has been available to the Council since 2012 and is priced at Gilts+80bps), and/or the HRA rate. The HRA rate is available to all Councils (the availability of which was extended out in the UK Government Budget to the 31 March 2026) to fund HRA capital expenditure, at a rate that is 40bps lower than the current certainty rate available from the PWLB (so priced at Gilts + 40bps). Both the General Services and HRA capital programmes are being kept under regular review due to the effects of inflationary pressures, shortages of materials and labour, and the ratios of financing costs to the net revenue streams and impact on the Council’s Medium Term Financial Strategy. The Council’s borrowing strategy will, therefore, also be regularly reviewed and then revised, if necessary, to achieve optimum value and risk exposure in the long-term. The impact particularly of the finalisation of the General Services Capital Plan Prioritisation will have a significant bearing on this. Council officers, in conjunction with Link, will continue to monitor daily long-term borrowing rates in order to take advantage of any dips in the market or to de-risk any change in the medium-longer term forecast for gilt yields. Debt Rescheduling Now that the whole of the yield curve has shifted and remains higher there may be opportunities for debt rescheduling in the remainder of the financial year. This would involve the Council repaying loans prematurely (both market and PWLB) whilst high discount rates on premature repayment prevail. Any debt rescheduling will be considered when the difference between the refinancing rate and the redemption rate is most advantageous and the situation will be continually monitored in order to take advantage of any perceived anomalies in the yield curve. The reasons for any rescheduling taking place would include: - the generation of cash savings at minimum risk; - to reduce the average interest rate; - to amend the maturity profile and/or the balance of volatility of the debt portfolio. Council officers will explore debt rescheduling opportunities with Link Treasury Solutions; with only prudent and affordable debt rescheduling Page 188 of 268
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9 that considers both the short and medium-longer term impact being considered. Funds on Deposit In accordance with the Prudential and Treasury Management Codes, it is the Council’s priority for funds on deposit to ensure:- • security of capital first • liquidity, and • finally to obtain an appropriate level of return which is consistent with the Council’s risk appetite. In the current economic climate, it is considered appropriate to keep any deposits short term to cover cash flow needs, but also to seek out value available in periods up to 12 months with high credit quality financial institutions, using the Link suggested creditworthiness approach, which includes a minimum sovereign credit rating and Credit Default Swap (CDS) overlay information. Based on the interest rate forecasts as outlined in Section 6.1 above, there is now a clear differential between any borrowing costs taken for new PWLB loans (whether 5 year, 25 year or 50 year), and interest earned on Fixed Term Deposits (FTD’s) of up to 12 months. Specifically, the cost of borrowing is now currently 5.00%-5.60% (PWLB certainty rates); whereas maximum interest earnable on FTD’s is 4.70% (so a differential of 0.30% to 0.90%). The forecast position in 12 months is similar – borrowing rates of 4.50%- 5.20% (certainty rates) compared to interest earnable on FTD’s of max 4.00% (so a differential of 0.50%-1.20%) In 24 months, borrowing rates of 4.20%-4.80% (certainty rates) compared to interest earnable on FTD’s of 3.80% (so a differential of 0.40%-1.00%) This would suggest that the optimum Treasury strategy would be to run down cash balances to allow borrowing to (continue to) be deferred for as long as possible i.e. no cash backing of reserves. £20.000 million of fixed term deposits held at 30 September 2024 mature in the latter half of the 2024/25 financial year. Based on the above, this £20.000 million deposit would mature in March 2025 and the funds would not be refinanced (i.e. not be placed back out on Fixed Term Deposit) and instead be used to allow the Council to continue to defer borrowing at the current plateaued PWLB borrowing yield curve. Clearly this position results in an increase in refinancing risk as the internal-borrowing / under-borrowed position is higher (c. £88m) at Page 189 of 268
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10 31/03/2025 compared to 31/03/2024 (£67m); however the flipside of this is that there is (a) an offsetting reduction in counterparty risk on deposits (no FTD’s placed) – thereby replacing one additional risk with an offsetting mitigation in risk elsewhere; and (b) furthermore that all the market led and economic forecast intelligence still points to the medium term forecast of a path of long-term borrowing rates gradually easing off over the next 24-36 months. Day to day liquidity to meet cashflow requirements is sourced from the Council’s three Money Market Funds, which all operate on an instant access basis. Interest rates receivable from these are currently between 4.95%-4.97%, reflective of the current Bank of England Base Rate, and will meander towards 4.75% in the coming month. The Council would keep enough liquidity in our MMF’s on a month-to-month basis to ensure we can manage our daily cashflow needs (£15m-£20m). An updated list of Countries for Deposits as at 14 November 2024 is included as Appendix 4. 6.3 Expected Loan & Fund on Deposit Portfolio at 31 March 2025 Taking all of the above into account, the expected loan and funds on deposit portfolios at 31 March 2025 is shown in Tables 6 and 7 below:- Table 6: Council’s forecast Loan Portfolio at 31 March 2025 Loan Type 31 March 2025 Principal Outstanding £000’s Weighted Average Rate PWLB Annuity 395 8.91% PWLB Maturity 358,502 3.24% LOBO 20,000 4.51% Market Loans 15,548 2.68% Total Loans 394,445 3.28% Underlying Borrowing Requirement 483,271 Over/(Under) Borrowing -88,826 Table 7: Council’s forecast Funds on Deposit Portfolio at 31 March 2025 Type 31 March 2025 Principal Outstanding £000’s Weighted Average Rate Money Market Funds 20,000 4.50% Total Deposits 20,000 4.50% Page 190 of 268
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11 The forecast Under-Borrowed position of £88.826m at 31/03/2025 as outlined in Table 5 above equates to 23% of the Council’s Total External Debt of £394.445m. The equivalent position at 31/03/2024 was 18% (£60.974m under-borrowed of a £340.871m Total External Debt Portfolio). Graph 1 below outlines the Under-Borrowed position of Scottish Councils as at the most recent balance sheet date (31/03/2024). A negative borrowing % indicates that the Council is Internally Borrowed, with this ratio calculated as the % of Under-Borrowing against the Council’s total External Debt Portfolio. Graph 1: Under-borrowed (Internal Borrowing) % of Scottish Councils at 31/03/2024 * Midlothian As can be noted, the majority of Scottish Councils are under-borrowed, with a median around the 20% mark. The proposed approach outlined above keeps the Council well within this Scotland-wide position. Page 191 of 268
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12 7 Prudential & Treasury Management Indicators 2024/25 It is a statutory duty for the Council to determine and keep under review the affordable capital expenditure and borrowing limits as outlined in the prudential and treasury management indicators reported as part of the Council’s suite of treasury management reports. The following prudential indicators have therefore been refreshed from those reported to Council on 27 February 2024 in the original Treasury Management and Annual Investment Strategy Statement 2024/25. These are technical revisions to the Prudential Indicators as a consequence of the revisions to the Council’s General Services and HRA Capital Plans and are based on the actual capital plan outturns for 2023/24, and revisions to the capital expenditure and income budgets for 2024/25. The Authorised Limit has been retained at the value set in the Treasury Management & Investment Strategy for 2024/25 as approved by Audit Committee and Council in February 2024. Table 8: Prudential Indicators 2024/25 – Mid Year Update Indicator 2024/25 Original Estimate £000’s 2024/25 Current Position £000’s 2024/25 Revised Estimate £000’s 2024/25 Capital Expenditure 181,578 41,764 124,138 2024/25 Required Borrowing 126,188 25,851 91,820 2024/25 Underlying Borrowing Requirement* 534,105 427,696 483,271 2024/25 Gross External Borrowing 509,105 359,811 394,445 2024/25 Over/(Under) Borrowing -25,000 -67,885 -88,825 Operational Boundary – Borrowing 534,105 483,271 483,271 2024/25 Capital Financing Requirement** 618,920 514,624 568,086 2024/25 Authorised Limit*** 534,105 534,105 534,105 Net Income from Service Investments as % of Net Revenue Stream 0.01% 0.01% Ratio of Financing Costs to Net Revenue Stream – General Services 2.40% 1.27% Ratio of Financing Costs to Net Revenue Stream – HRA 48.13% 43.24% Ratio of HRA Debt to Net Revenue Stream 920% 809% Ratio of HRA Debt per Dwelling 41 38 * Excludes “On balance sheet” PPP schemes. ** Includes “On balance sheet” PPP schemes. *** Equates to the original estimate of the 2024/25 Underlying Borrowing Requirement The Capital Financing Requirement (CFR) denotes the Council’s underlying need to borrow for capital purposes. The CFR includes borrowing arising as a result of the Council’s Capital Plans, plus the Page 192 of 268
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13 long-term liability arising from the Council’s PPP and DBFM contracts. The Underlying Borrowing Requirement strips out the latter of these (long-term liability arising from the two PPP contracts) from the CFR. The Authorised Limit represents the statutory limit determined under section 3 (1) of the Local Government Act 2003, and is the limit beyond which borrowing is prohibited. This limit needs to be set and revised by Members. For 2024/25 this was calculated to equate to the forecast value of the 2024/25 Underlying Borrowing Requirement. During the half year ended 30th September 2024, the Council has operated within the treasury and prudential indicators set out in the Council’s Treasury Management Strategy Statement for 2024/25. All treasury management operations have also been conducted in full compliance with the Council's Treasury Management Practices. Page 193 of 268
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14 8 Performance Indicators 2023/24 – Comparison with Other Scottish Local Authorities The Treasury Management Forum collates performance indicators for all Scottish Local Authorities. The indicators relating to financial year 2023/24 have been published and once again demonstrate the continuing effectiveness of the Council’s Treasury function in maximising efficiency in Treasury Management activity, with the Council having the 2nd lowest weighted average borrowing & investment (loans fund) rate across all Scottish mainland authorities in 2023/24 (2.08%). The Council has consistently maintained the loans fund rate as one of the lowest across all Scottish mainland authorities for the last decade and more. Appendix 5 outlines the loans fund rate for each Scottish Local Authority in 2023/24. Were the internal loans fund rate for 2023/24 to have equated to the Scottish weighted average for 2023/24 of 3.66%, this would have generated loan charges for Midlothian Council in 2023/24 of £23.3m. The Council’s actual 2023/24 loan charges for General Services and HRA were £17.3m, representing a cash saving (compared to the Scottish average) of £5.9m in 2023/24. The forecast loans fund rate of 2.53% for 2024/25 is expected to once again be one of the lowest for all Scottish Local Authorities. 9 Summary Treasury Management activity during the year to 30 September 2024 has been effective within the parameters set by the strategy for the year. Any further long-term borrowing for the remainder of 2024/25 will be in line with the approved strategy, and reflective of the borrowing requirement arising from the General Services and HRA capital plans reported to Council on 12 November 2024. Officers will continue to review the opportunities available to the Council for deposit of funds as governed by the approved strategy. The Prudential and Treasury Management Indicators have been updated to reflect current capital expenditure and income projections. 10 Report Implications 10.1 Resource Expenditure from Treasury Management activity i.e. loan charges, was reported in the quarterly financial positions to Council, with Quarter 2 Page 194 of 268
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15 monitoring reflected in the Financial Monitoring 2024/25 – General Fund Revenue report that was presented to Council on 12 November 2024. 10.2 Digital None. 10.3 Risk As the Council follows the requirements of the CIPFA Code of Practice for Treasury Management, and the Prudential Code, there is a reduced level of risks involved in Treasury Management activities. Those risks that do exist are further controlled through written Treasury Management Practices which define the responsibilities of all staff involved, which were reviewed and approved by Audit Committee as part of the presentation of the 2022/23 Mid-Year Review Report on 6 December 2022. 10.4 Ensuring Equalities There are no equalities issues arising directly from this report. 10.5 Additional Report Implications See Appendix A. Page 195 of 268
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16 Appendix A: Report Implications A.1 Key Priorities within the Single Midlothian Plan Not applicable. A.2 Key Drivers for Change A.3 Key Delivery Streams Themes addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious None of the above A.4 Delivering Best Value The report does not directly impact on Delivering Best Value. A.5 Involving Communities and Other Stakeholders Although no external consultation has taken place, cognisance has been taken of professional advice obtained from Link Treasury Solutions Limited, the Council’s appointed Treasury Consultants. A.6 Impact on Performance and Outcome The strategies adopted are an integral part of the corporate aim to achieve Best Value as they seek to minimise the cost of borrowing by exercising prudent debt management and investment. This in turn helps to ensure that the Council’s capital expenditure is sustainable in revenue terms. A.7 Adopting a Preventative Approach Not applicable. A.8 Supporting Sustainable Development Not applicable. Page 196 of 268
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17 Background Papers: Appendix 1: Economic Update for first part of 2024/25 financial year Appendix 2: PWLB Borrowing Rates 1 April 2023 to 30 September 2024 Appendix 3: Bank Rate and SONIA Rates 1 April 2023 to 30 September 2024 Appendix 4: Approved Countries for Deposits as at 14 November 2024 Appendix 5: Loans Fund Rate Comparison Scottish Local Authorities 2023/24 Page 197 of 268
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18 Appendix 1: Economic Update for first part of 2024/25 financial year The third quarter of 2024 (July to September) saw: • GDP growth stagnating in July following downwardly revised Q2 figures (0.5% q/q) • A further easing in wage growth as the headline 3myy rate (including bonuses) fell from 4.6% in June to 4.0% in July; • CPI inflation hitting its target in June before edging above it to 2.2% in July and August; • Core CPI inflation increasing from 3.3% in July to 3.6% in August; • The Bank of England initiating its easing cycle by lowering interest rates from 5.25% to 5.0% in August and holding them steady in its September meeting; • 10-year gilt yields falling to 4.0% in September. The economy’s stagnation in June and July points more to a mild slowdown in GDP growth than a sudden drop back into a recession. Moreover, the drop in September’s composite activity Purchasing Managers Index, from 53.8 in August to 52.9, was still consistent with GDP growth of 0.3%-0.4% for the summer months. This is in line with the Bank of England’s view, and it was encouraging that an improvement in manufacturing output growth could be detected, whilst the services PMI balance suggests non-retail services output grew by 0.5% q/q in Q3. Additionally, the services PMI future activity balance showed an uptick in September, although readings after the Chancellor’s announcements at the Budget on 30th October will be more meaningful. The 1.0% m/m jump in retail sales in August was stronger than the consensus forecast for a 0.4% m/m increase. The rise was reasonably broad based, with six of the seven main sub sectors recording monthly increases, though the biggest gains came from clothing stores and supermarkets, which the ONS reported was driven by the warmer-than-usual weather and end of season sales. As a result, some of that strength is probably temporary. The further easing in wage growth will be welcomed by the Bank of England as a sign that labour market conditions are continuing to cool. The 3myy growth rate of average earnings fell from 4.6% in June to 4.0% in July. On a three-month annualised basis, average earnings growth eased from 3.0% to 1.8%, its lowest rate since December 2023. Excluding bonuses, the 3myy rate fell from 5.4% to 5.1%. Other labour market indicators also point to a further loosening in the labour market. The 59,000 fall in the alternative PAYE measure of the number of employees in August marked the fourth fall in the past five months. And the 77,000 decline in the three months to August was the biggest drop since November 2020. Moreover, the number of workforce jobs fell by 28,000 in Q2. The downward trend in job vacancies continued too. The number of job vacancies fell from 872,000 in the three months to July to 857,000 in the three months to August. That leaves it 34% below its peak in May 2022, and just 5% above its pre-pandemic level. Nonetheless, the Bank of England is still more concerned about the inflationary influence of the labour market rather than the risk of a major slowdown in labour market activity. CPI inflation stayed at 2.2% in August, but services inflation rose from a two-year low of 5.2% in July to 5.6%, significantly above its long-run average of 3.5%. Food and Page 198 of 268
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19 fuel price inflation exerted some downward pressure on CPI inflation, but these were offset by the upward effects from rising furniture/household equipment inflation, recreation/culture inflation and a surprisingly large rise in airfares inflation from - 10.4% in July to +11.9% in August. As a result, core inflation crept back up from 3.3% to 3.6%. CPI inflation is also expected to rise in the coming months, potentially reaching 2.9% in November, before declining to around 2.0% by mid-2025. The Bank initiated its loosening cycle in August with a 25bps rate cut, lowering rates from 5.25% to 5.0%. In its September meeting, the Bank, resembling the ECB more than the Fed, opted to hold rates steady at 5.0%, signalling a preference for a more gradual approach to rate cuts. Notably, one Monetary Policy Committee (MPC) member (Swati Dhingra) voted for a consecutive 25bps cut, while four members swung back to voting to leave rates unchanged. That meant the slim 5-4 vote in favour of a cut in August shifted to a solid 8-1 vote in favour of no change. Looking at gilt movements in the first half of 2024/25, the 10-year gilt yield declined from 4.32% in May to 4.02% in August as the Bank’s August rate cut signalled the start of its loosening cycle. Following the decision to hold the Bank Rate at 5.0% in September, the market response was muted, with the 10-year yield rising by only 5bps after the announcement. This likely reflected the fact that money markets had priced in a 25% chance of a rate cut prior to the meeting. The yield had already increased by about 10bps in the days leading up to the meeting, driven in part by the Fed's "hawkish cut" on 18 September. There is a possibility that gilt yields will rise near-term as UK policymakers remain cautious due to persistent inflation concerns, before declining in the longer term as rates fall to 3.0%. MPC meetings: 9 May, 20 June, 1 August, 19 September 2024 On 9 May, the Bank of England’s Monetary Policy Committee (MPC) voted 7-2 to keep Bank Rate at 5.25%. This outcome was repeated on 20th June. However, by the time of the August meeting, there was a 5-4 vote in place for rates to be cut by 25bps to 5%. However, subsequent speeches from MPC members have supported Governor Bailey’s tone with its emphasis on “gradual” reductions over time. Markets thought there may be an outside chance of a further Bank Rate reduction in September, following the 50bps cut by the FOMC, but this came to nothing. Page 199 of 268
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20 Appendix 2: PWLB Borrowing Rates 1 April 2024 to 30 September 2024 The graphs and table below show the movement in PWLB certainty rates for the first six months of the year to date: PWLB certainty rates 1 April 2024 to 30th September 2024 1 Year 5 Year 10 Year 25 Year 50 Year 02/04/2024 5.39% 4.72% 4.80% 5.28% 5.07% 30/09/2024 4.95% 4.55% 4.79% 5.33% 5.13% Low 4.78% 4.31% 4.52% 5.08% 4.88% Low date 17/09/2024 17/09/2024 17/09/2024 17/09/2024 17/09/2024 High 5.61% 5.14% 5.18% 5.61% 5.40% High date 29/05/2024 01/05/2024 01/05/2024 01/05/2024 01/05/2024 Average 5.21% 4.76% 4.88% 5.35% 5.14% Spread 0.83% 0.83% 0.66% 0.53% 0.52% 4.00% 4.40% 4.80% 5.20% 5.60% 6.00% PWLB Rates 2.4.24 - 30.9.24 1 Year 5 Year 10 Year 25 Year 50 Year 50 year target % 3.00 3.40 3.80 4.20 4.60 5.00 5.40 5.80 6.20 6.60 7.00 PWLB Certainty Rate Variations 2.4.24 to 30.9.24 2-Apr-24 30-Sep-24 Average Page 200 of 268
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21 The current PWLB rates are set as margins over gilt yields as follows:- • PWLB Standard Rate is gilt plus 100 basis points (G+100bps) • PWLB Certainty Rate (GF) is gilt plus 80 basis points (G+80bps) • PWLB Local Infrastructure Rate is gilt plus 60 basis points (G+60bps) • PWLB Certainty Rate (HRA) is gilt plus 40bps (G+40bps) PWLB maturity certainty rates (gilts plus 80bps) year to date to 30 September 2024 Gilt yields and PWLB certainty rates were less volatile than at this time last year. Overall, the 10, 25 and 50-year part of the curve endured a little volatility but finished September very much as it started in April. Where there was some movement downwards, this came in the shorter part of the curve as markets positioned themselves for Bank Rate cuts in the second half of 2024 and into 2025, although the continued stickiness of inflation and the prevailing tight labour market is a concern for those looking for more sizeable falls ahead. At the beginning of April, the 5-year certainty rate was the cheapest part of the curve at 4.72% whilst the 25-year rate was relatively expensive at 5.28%. May saw yields at their highest across the whole curve. Conversely, 17 September saw the low point for the whole curve, with the 5-year certainty rate falling to 4.31% before rebounding to 4.55% by the end of the month. Similarly, the 50-year certainty rate fell to 4.88% but finished the month at 5.13%, slightly higher than at the start of April. At this juncture, PWLB rates are still forecast to fall back over the next two to three years as inflation dampens, although there is upside risk to the Bank Rate forecast at present. The CPI measure of inflation is expected to fall below 2% in the second half of 2025, however, and we forecast 50-year rates to stand at 4.20% by the end of September 2026. The major caveats are that there is considerable gilt issuance to be digested by the market over the next couple of years, and geo-political uncertainties – which are generally negative for inflation prospects – abound in Eastern Europe and the Middle East, in particular. Page 201 of 268
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22 Appendix 3: Bank Rate and SONIA Rates 1 April 2024 to 30 September 2024 The graphs and table below show the movement in Bank and SONIA rates for the first six months of the year to date: Creditworthiness: The UK’s sovereign rating has proven robust through the first half of 2024/25. Deposit Counterparty criteria: The current deposit counterparty criteria selection approved in the TMSS is meeting the requirement of the treasury management function. CDS prices: It is noted that sentiment in the current economic climate can easily shift, so it remains important to undertake continual monitoring of all aspects of risk and return in the current circumstances. 4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 Bank Rate vs term SONIA rates % 2.4.24 - 30.9.24 Bank Rate SONIA 1 mth 3 mth 6 mth 12 mth Bank Rate SONIA 1 mth 3 mth 6 mth 12 mth High 5.25 5.20 5.21 5.20 5.17 5.08 High Date 02/04/2024 03/05/2024 27/06/2024 17/04/2024 31/05/2024 30/05/2024 Low 5.00 4.95 4.90 4.79 4.58 4.17 Low Date 01/08/2024 01/08/2024 17/09/2024 17/09/2024 17/09/2024 17/09/2024 Average 5.17 5.12 5.11 5.06 4.96 4.75 Spread 0.25 0.25 0.31 0.41 0.58 0.91 Page 202 of 268
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23 Appendix 4: Approved Countries for Deposit as at 14 November 2024 AAA • Australia • Denmark • Germany • Netherlands • Norway • Singapore • Sweden • Switzerland AA+ • Canada • Finland • U.S.A. AA • Abu Dhabi (UAE) • Qatar AA- • Belgium • France • U.K. Page 203 of 268
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24 Appendix 5: Loans Fund Rate Comparison Scottish Local Authorities 2023/24 & 2022/23 2022/23 2023/24 Argyll & Bute 2.52% 0.91% Midlothian 2.41% 2.08% East Lothian 2.66% 2.80% Perth & Kinross 2.71% 2.80% Aberdeenshire 2.53% 2.87% Fife 3.54% 3.16% East Ayrshire 3.24% 3.39% Shetland 3.45% 3.45% Dumfries & Galloway 3.43% 3.72% Moray 3.54% 3.77% South Ayrshire 3.24% 3.77% Aberdeen City 3.51% 3.87% East Renfrewshire 3.34% 3.89% Glasgow City 3.68% 3.92% North Ayrshire 3.45% 4.02% Highland 3.49% 4.04% West Dunbartonshire 2.47% 4.05% West Lothian 3.65% 4.06% East Dunbartonshire 3.63% 4.14% Angus 4.03% 4.19% Edinburgh City 3.96% 4.29% North Lanarkshire 2.96% 4.45% Inverclyde 3.85% 4.46% Orkney 3.32% 4.48% Falkirk 3.66% 4.56% Stirling 4.18% 4.87% Loans Fund RateAuthority Page 204 of 268
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Audit Committee Monday 25 November 2024 Item 5.4 Internal Audit Work to October 2024 Report by Chief Internal Auditor Report for Decision 1 Recommendations The Audit Committee is asked to: a) Consider the Executive Summary of the final Internal Audit assurance report issued associated with the delivery of the approved Internal Audit Annual Plan 2024/25; b) Note the Internal Audit Consultancy and Other Work carried out in accordance with the approved Internal audit Charter; and c) Acknowledge the assurance provided on internal controls and governance arrangements in place for the areas covered by this Internal Audit work. 2 Purpose of Report/Executive Summary The purpose of this report is to provide members of the Audit Committee with details of the recent work carried out by Internal Audit and the findings and recommended audit actions agreed by Management to improve internal controls and governance arrangements. The Internal Audit Annual Plan 2024/25 was approved by the Audit Committee on 18 March 2024. Internal Audit has carried out work associated with the delivery of the plan to meet its objective of providing an opinion on the efficacy of the Council’s risk management, internal control and governance. An Executive Summary of the final Internal Audit assurance report issued, including audit objective, findings, good practice and recommendations (where appropriate), and the Chief Internal Auditor’s independent and objective opinion on the adequacy of the control environment and governance arrangements within each audit area, is shown in Appendix 1. The Internal Audit function conforms to the professional standards as set out in Public Sector Internal Audit Standards (PSIAS) (2017) including the production of this report to communicate the results of the reviews. Date 1 November 2024 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 205 of 268
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2 3 Progress Report 3.1 The Internal Audit Annual Plan 2024/25 was approved by the Audit Committee on 18 March 2024. Internal Audit has completed the following work in the period from 18 September to 31 October 2024 associated with the delivery of the plan to meet its objective of providing an opinion on the efficacy of the Council’s risk management, internal control and governance. 3.2 The Internal Audit function conforms to the professional standards as set out in Public Sector Internal Audit Standards (PSIAS) (2017), including the production of this report to communicate the results. 3.3 Internal Audit issued final assurance reports on the following subject: • Midlothian Energy • Attainment Scotland Funding 3.4 An Executive Summary of the final Internal Audit assurance reports issued in respect of Midlothian Energy and Attainment Scotland Funding, including audit objective conclusions, key findings and recommendations and areas of good practice, including the Chief Internal Auditor’s independent and objective opinion on the adequacy of the control environment and governance arrangements within each audit area, is shown in Appendix 1. The definitions for Internal Audit assurance categories are as follows: Level Definition Substantial Assurance A sound system of governance, risk management and control exists, with internal controls operating effectively and being consistently applied to support the achievement of objectives in the area audited. Reasonable Assurance There is a generally sound system of governance, risk management and control in place. Some issues, non-compliance or scope for improvement were identified which may put at risk the achievement of objectives in the area audited. Limited Assurance Significant gaps, weaknesses or non-compliance were identified. Improvement is required to the system of governance, risk management and control to effectively manage risks to the achievement of objectives in the area audited. No Assurance Immediate action is required to address fundamental gaps, weaknesses or non-compliance identified. The system of governance, risk management and control is inadequate to effectively manage risks to the achievement of objectives in the area audited. Internal Audit Consultancy and Other Work 3.6 Internal Audit staff have been involved in the following for the Council to meet its aims and objectives, and its roles and responsibilities in accordance with the approved Internal Audit Charter and Strategy: a) In its critical friend role provided an independent view and challenge at various forums including: Capital Plan and Asset Management Board, Chief Officers Risk & Resilience Group, and the Integrity Group. b) Learning and development during the research stage of new audit areas for all Internal Audit team members and through joining virtual audit forums (Computer Audit Sub-group) and meetings; and c) Monitored publication of Audit Scotland reports. Page 206 of 268
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3 Recommendations 3.7 Recommendations in reports are suggested changes to existing procedures or processes to improve the controls or to introduce controls where none exist. The grading of each recommendation reflects the risk assessment of non-implementation, being the product of the likelihood of the risk materialising and its impact: High Recommendations relating to factors fundamental to the success of the control objectives of the system. The weaknesses may give rise to significant financial loss/misstatement or failure of business processes. Medium Recommendations which will improve the efficiency and effectiveness of the existing controls. Low Recommendations concerning minor issues that are not critical, but which may prevent attainment of best practice and/or operational efficiency. Outwith the report, Internal Audit informs operational managers about other matters as part of continuous improvement. 3.8 The table below summarises the number of Internal Audit recommendations made during 2023/24: Recs Rating 2024/25 Number of Recs High 0 Medium 6 Low 9 Not Graded 0 Sub-total reported this period 15 Previously reported 0 Total 15 Recommendations agreed with action plan 15 Not agreed; risk accepted 0 Total 15 4 Report Implications (Resource, Digital, Risk and Equalities) 4.1 Resource Resource implications of implementing Internal Audit recommendations are considered as part of the audit process to ensure these are reasonable and proportionate to the risks. 4.2 Digital There are no digital implications arising from this report. Page 207 of 268
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4 4.3 Risk The PSIAS require Internal Audit to evaluate the effectiveness of the Council’s Risk Management arrangements and contribute to improvements in the process. At the start of each audit engagement, to capture potential areas of risk and uncertainty more fully, key stakeholders have been consulted and risk registers have been considered. During each audit engagement the management of risk has been tested. It is anticipated that improvements in the management and mitigation of risks will arise as a direct result of Management implementing the Internal Audit recommendations made. If audit recommendations are not implemented, there is a greater risk of financial loss and/or reduced operational efficiency and effectiveness, and Management may not be able to demonstrate improvement in internal control and governance arrangements, and effective management of risks. 4.4 Ensuring Equalities This report does not relate to a new or revised policy, service or budget change, which affects people (the public or staff), so an Integrated Impact Assessment (IIA) is not an applicable consideration. The Internal Audit work is carried out in accordance with the appropriate legislation and professional standards. The latter includes compliance by those within the Internal Audit function with the Code of Ethics set out in the PSIAS which is appropriate for the profession of Internal Audit founded as it is on trust placed in its independent and objective assurance about risk management, internal control and governance. 4.5 Additional Report Implications (See Appendix A) Page 208 of 268
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5 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Although this report does not relate directly to the key priorities within the Single Midlothian Plan to which Midlothian Council and its Community Planning Partners have made a commitment (Reducing the gap in economic circumstances; Reducing the gap in learning outcomes; Reducing the gap in health outcomes; and Reducing the impact of climate change), good governance is important to enable Midlothian Council to deliver its key priorities in support of achieving the Council’s objectives. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above Midlothian Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is applicable to the Council’s Internal Audit service provision to assist the Council in achieving its objectives. A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The definition of Internal Auditing within the Public Sector Internal Audit Standards (PSIAS) is “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” Implementation by Management of the actions associated with Internal Audit recommendations, that are designed to improve internal control and governance arrangements and management of risks, underpins the Council’s own continuous improvement arrangements to enhance its effectiveness, thus supporting the delivery of the Council’s best value duties. Page 209 of 268
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6 A.5 Involving Communities and Other Stakeholders The Chief Internal Auditor is accountable to the Audit Committee which, in fulfilling its governance role, acts as a bridge between the Council and other stakeholders. This report has been presented to Senior Management relevant to the areas audited have agreed the final Internal Audit assurance reports as set out in the relevant Executive Summary within Appendix 1 & report in appendix 2. A.6 Impact on Performance and Outcomes The Findings and Recommendations from Internal Audit work during the year are designed to assist the Council in improving its performance and outcomes. A.7 Adopting a Preventative Approach Internal Audit assurance work includes assessments on when a preventative approach can be adopted. A.8 Supporting Sustainable Development This report does not relate directly to supporting sustainable development. Good governance is important to enable Midlothian Council to achieve its objectives. Page 210 of 268
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Appendix 1: Executive Summary: Midlothian Energy Conclusion: Reasonable Assurance Reasonable processes have been established to support the governance arrangements of Midlothian Energy Limited (MEL). Monitoring regimes have been established to ensure the delivery of outcomes for the Council including the financial and operational risks of the joint venture. However, weaknesses were noted with the risk management policy and reporting arrangements, the reporting of financial information, the completeness of the annual Business Plan, the consistency of recharging Midlothian officer time, and the Council’s risk assessment processes for the approval for new projects that require no equity funding from the Council. Background MEL is a 50/50 Joint Venture between Midlothian Council and Vattenfall Heat UK (VHUK), established in 2020. MEL’s purpose is to design, build, own, operate and maintain a low carbon district heating network and ultimately other energy solutions across the Millerhill development area and beyond. A Business Plan is prepared by MEL each financial year covering a period of five financial years from the date it is prepared and sets out the agreed funding contributions, if required, for each Shareholder. A Shareholders Agreement is in place which sets out the governance and procedural arrangements between Midlothian Council and VHUK and identifies reserved matters that must be brought back to shareholders for approval. The Chief Executive, with delegated authority from Council, appointed two nominated Council Directors on the Board of representatives. Additionally, there is a Concession Agreement between the Council and VHUK which provides the contractual framework for the Council (as the local authority and not as shareholder in MEL) to further approve those projects which involve Council heat demand or require Council resources. The Concession Agreement grants exclusivity to MEL to deliver any project relying on the Millerhill heat network which is being installed for the Millerhill Low Carbon Heat project, and first right of refusal to deliver other decentralised heating projects in Midlothian and the surrounding area where the Council has control over delivery. 2 Management Services Agreements are in place between MEL and Midlothian Council and between MEL and VHUK which set out in further detail the activities the parties have agreed to perform under the Shareholders Agreement. Summary of findings & recommendations The following key findings and recommendations are highlighted, which have been agreed by Management: • Whilst the Business Plan is reported annually and includes a lot of relevant information on MEL’s activities, many of the financial reporting aspects detailed as requirements in the Shareholders Agreement were not being reported. Management will include all the requirements detailed in the Shareholders Agreement in future annual Business Plans, reported to the Audit Committee with Annual Accounts by March 2025. • Although financial information extracts are being regularly provided to MEL’s Finance Committee, full management accounts, as required by the Shareholders Agreement, are not being provided. Management will develop processes to provide full management accounts to the Finance Committee going forward by 31 March 2025 Page 211 of 268
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• There is no separate risk register for approved projects or an overall MEL risk register within the MEL SharePoint directory. Additionally, there is no separate MEL Risk Management Policy. Management will enhance MEL’s risk management processes by 31 March 2025. • An appropriate risk assessment procedure is not in place to determine whether an initial project proposal or business case that requires no capital funding from the Council should be brought to members for approval due to the inherent risks of the project. Management will develop an appropriate risk assessment procedure by 31 March 2025. • Midlothian’s approach to recharging officer time is inconsistent with 1 Midlothian Director fully recharging all of their time, and the other not recharging any of their time. Management will develop a consistent approach for the recharge of officer time to MEL by 31 March 2025. Recommendation Summary Recommendations Grade High Medium Low Total Current Report - 2 4 6 Prior Report (N/A) - - - - Materiality Midlothian Council Total Contribution to MEL – £10.2m Vattenfall Heat UK Total Contribution to MEL – £10.2m Low Carbon Infrastructure Transition Programme Funding – £7.3m Page 212 of 268
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Headlines Objectives Conclusion Comments 1. Effective, accountable and appropriate governance structures are in place between the Council, Vattenfall and Midlothian Energy. Reasonable Assurance The Shareholders Agreement and other supporting agreements have provided an appropriate framework for MEL to operate. Additionally, appropriate internal governance structures have been established which include the Board of Directors, Finance Committee, Project Origination Committee and Project Committee with relevant Terms of References in place. A central register was not in place for MEL directors to log declared conflicts of interest; this issue was addressed during the review. Whilst the Business Plan is reported annually, many of the financial reporting aspects detailed as requirements in the Shareholders Agreement were not being reported. 2. Processes are in place to ensure that all parties are complying with the approved agreements and governance arrangements Reasonable Assurance As per the agreement, two Midlothian officers are in place as MEL directors, but it was noted that the recharging of officer time is inconsistent resulting in a small financial loss to the Council. Regular and comprehensive progress updates are provided on MEL’s activities and reported via MEL’s committees. The meetings are well attended, and the discussion and actions are logged in minutes and an action tracker. VHUK have assigned a company secretary to MEL to help ensure compliance with the approved agreements. Although financial information is being provided, full quarterly management accounts were not being provided as required. 3. Appropriate monitoring and assurance arrangements are in place and key risks, both financial and operational, are being identified, managed and transparently reported Reasonable Assurance Project risks are reported via the management information slide-pack provided by VHUK each month and MEL risks are reported annually in the Business Plan submitted to Council. MEL’s liquidity is monitored via the Finance Committee and informed by MEL’s financial modelling. Processes are in place for any project requiring equity funding to be approved by Council with a supporting Business Case. However, there are no separate MEL risk registers for approved projects or an overall MEL risk register within the MEL SharePoint directory, and there is no approved MEL risk management policy. Additionally, there is a need to clarify Council risk assessment procedures for the approval of MEL projects requiring no equity funding. 4. Progress on the delivery of outcomes are reported and appropriately reviewed, including information on the timescales for the delivery of Midlothian Energy Projects and the Council’s financial commitments Reasonable Assurance Council receives a detailed update on the progress made with MEL towards the company’s objectives via an annual members’ briefing and the presentation of the annual business plan. MEL directors and relevant officers attend regular meetings via the MEL committees and updates are provided as part of the monthly slide-pack provided by VHUK. The Finance Committee is attended by the Council’s Chief Financial Officer (s95 officer) and another accountant within the Financial Services Team and updates are provided on MEL’s financial commitments, liquidity, and project costs. MEL are planning on publishing more public facing information to promote the company; no recommendation has been made on this as this work is already underway. Page 213 of 268
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Areas where expected controls are met/good practice No. Areas of Positive Assurance 1. The various agreements established between the Council, Vattenfall and MEL provide a strong basis for a governance framework and the majority of the requirements are being followed. 2. Appropriate governance frameworks have been established via various MEL committees. These committees are well attended, receive appropriate information, relevant business is discussed, and decisions and actions are well documented. 3. MEL is actively working towards expanding their heat network in line with the company’s objectives and regular updates are received on progress made each month. 4. Guidance has been drafted by the Council’s legal advisors on the roles and responsibilities of directors, including rules on declaration of conflicts of interest, and provided to both Midlothian directors. VHUK directors have been provided with their own guidance. 5 Members are receiving relevant annual updates via the members’ briefing and annual report. Page 214 of 268
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Executive Summary: Attainment Scotland Funding Conclusion: Reasonable Assurance Reasonable processes have been established to support the governance, monitoring and utilisation of Attainment Scotland Funding (made up of Pupil Equity, Strategic Equity and Care Experienced Children and Young People Funding) in line with Council procedures and National Operational Guidance for each type of funding. However, weaknesses were noted with the procedures and monitoring arrangements for School Funds. In addition, some issues were identified in the application of the Council’s procurement processes for PEF and CECYP expenditure. Background Funding is distributed from the Scottish Government to local authorities through Pupil Equity Funding (PEF), Strategic Equity Funding (SEF), and Care Experienced Children and Young People Funding (CECYP). Funding received by Midlothian Council is monitored and evaluated via the Excellence and Equity Board chaired by the Education Chief Operating Officer and attended by relevant management. Information provided by the Quality Improvement Manager shows that the attainment gap has narrowed in Midlothian for S3 level pupils and for attainment of SCQF level 5 and 6 qualifications but appears to have recently widened for primary level pupils. Work is underway to establish the reasoning behind this and further improve the quality of information provided to teachers and the Excellence and Equity Board. Midlothian Council fully allocates PEF to schools without allocating any percentage of the total funding to support the administration of the scheme as some other authorities do. Summary of findings and recommendations The following key findings and recommendations are highlighted, which have all been agreed by Management: • Since the Covid Pandemic, schools have not been providing an audit report of their school fund each year to appropriate officers. Management will annually request these reports and check for compliance by March 2025. • Transfers from PEF budgets to school funds have significantly increased over the past 3 years from £3,381 in 2021/22 to £74,576 in 2023/24. The majority of the increase is due to the implementation of the ‘Cost of the School Day’ project, involving some schools establishing Hardship Funds within their school fund or widening the access of school trips to families that would otherwise not be able to pay both funded by PEF. Processes have not yet been established for schools to formally report on their respective Hardship Fund spend funded through PEF. Management will update the Guidelines and improve the monitoring arrangements over PEF transferred to School Funds by 31 March 2025. • Although a Service Level Agreement (SLA) is in place for play therapy for Early Years, no SLA is in place for PEF spend. Play therapy PEF spend was £258,350 between 2021/22 and 2023/24. A Non-Competitive Action Form (NCA) was completed, but it expired in June 2022. In addition, some spend over the procurement threshold of £5,000 was made by schools using PEF without submission of a Procurement form. Management will authorise an NCA, agree an SLA with the supplier and increase their monitoring of PEF procurement by 31 March 2025. • The CECYP fund utilises an art therapy supplier to support its annual programme. At the time of review, an SLA was not in place with the supplier and an NCA form had not been submitted to Procurement; the spend is £42,000 per annum. Management will arrange for an NCA to be authorised, and an SLA agreed with the supplier by 31 March 2025. Recommendation Summary (NB – the Prior Report only covered Pupil Equity Funding) Recommendations Grade High Medium Low Total Current Report - 4 5 9 Prior Report (2019) 1 3 1 5 Materiality 2023/24 allocations of Attainment Scotland Funding are as follows: • Pupil Equity Funding - £2,423,905 • Strategic Equity Funding - £346,266 • Care Experienced Children and Young People - £150,675 Page 215 of 268
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Headlines Objectives Conclusion Comments 1. Adequate financial control, business administrative procedures, budgetary and monitoring arrangements are in place. Reasonable Assurance Reasonable processes are in place within Financial Services to provide budgetary monitoring for Attainment Scotland Funding. Schools are provided with regular monitoring information of their PEF spend as are relevant service managers for the CECYP and Strategic Equity Funding. Some limited examples were seen of generic office administrative expenditure going through PEF budgets. There are no written procedures outlining the arrangements for the monitoring of PEF funds and although a monitoring spreadsheet tracking when schools were met with and when monitoring is issued is in place, no formal minute is taken of these meetings. 2. Appropriate governance arrangements and planning processes are in place to ensure effective utilisation of the funding including compliance with relevant Council procedures. Reasonable Assurance The strategic evaluation of all Attainment Scotland Funding is monitored via the Excellence and Equity Board. The board is relatively new (first met in March 2024) and appears to be operating well in line with the board’s Terms of Reference. Detailed reporting on attainment and attendance is submitted to the board and the board has representation from all relevant senior managers. Quality Improvement Managers and the Scottish Government’s attainment advisor support schools in developing their PEF plans and provide schools with templates to document these. PEF had a significant underspend of £1.763m in March 2022, but including committed expenditure for the 2024 summer term, the carried forward budget is anticipated to be fully utilised by almost all schools. Issues were identified with the monitoring of School Funds which need to be addressed. Some non-compliance with the Council’s Procurement Regulations was noted. 3. Adequate management performance reporting and evaluation measures are in place including engagement with stakeholders, communication of plans, and monitoring of outcomes in line with the National Operational Guidance. Reasonable Assurance The Quality Improvement Manager has provided a final drawdown report for the previous team funded by the CECYP funding; the previous team had a Children’s Services focus. An Education Support Officer has been in place since January 2024 and a detailed plan for CECYP has been created to support the revised approach including improving data on care experienced young people, establishing ‘Promise Leads’ at all schools and improving support for leavers. A detailed annual evaluation has been prepared for the Family Wellbeing Service. As it is a new team, there is only 1 report thus far. The report identified the need to improve the quality of data, in particular in relation to attendance, and measures have been put in place to address this. Schools carry out an evaluation of the impact of PEF within their Standards Quality Improvement Plan. Excellence and Equity (E&E) Workbooks have been created to allow schools to effectively document and monitor their plan, but improvements are required to ensure that the evaluations are completed comprehensively by all schools (no schools from sample of 11 fully completed this in 2022/23, however this was the first year of this revised format). The Quality Improvement Managers provide quarterly PEF updates to the E&E Board. Page 216 of 268
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Areas where expected controls are met/good practice No. Areas of Positive Assurance 1. Appropriate financial monitoring information is provided regularly to schools and managers. Relevant Cost Centres and Expense Heads have been established to ensure budgets are monitored as required. A separate cost centre has been established for each school’s PEF budget to allow it to be easily monitored and ensure it is distinct from other devolved budgets. Allocated budgets were agreed to the grant documentation received from the Scottish Government. 2. The strategic evaluation of all Attainment Scotland Funding is monitored via the Excellence and Equity Board chaired by the Education Chief Operating Officer. Although the board is relatively new, it appears to be operating well, has appropriate representation and is receiving appropriate monitoring information on all aspects of Attainment Scotland Funding. CECYP and Strategic Equity Funding have been appropriately allocated to be utilised by the Council in line with the aims of the funding. Schools have worked with Financial Services, Quality Improvement Managers and the Scottish Government’s Attainment Advisor to develop plans for their PEF budgets. The historic issue of an underspend in PEF being brought forward each year has been addressed by Midlothian’s schools. 3. An appropriate framework has been provided to allow Midlothian’s schools to evaluate the effectiveness of their PEF interventions. Support is provided by the Quality Improvement Managers and the Scottish Government’s Attainment Advisor. Relevant information is provided to schools regarding their current attainment gap compared to prior years and work is underway to further improve the information provided to schools using Google Data Studio and Looker Studio. Schools are carrying out various Stakeholder Consultations on their use of PEF as noted in their SQIPs. Appropriate and recent evaluation reports have been prepared for the Family Wellbeing Service and the CECYP Funding. Plans have been prepared for both of these to further improve processes, evaluation measures and monitoring of outcomes. From the reports received, these areas appear to be complying with the relevant National Operational Guidance. 4 The PEF Workbooks have been updated to Excellence and Equity Workbooks which will allow for more detailed analysis of PEF plans if completed appropriately. There is an expectation that all schools will complete updates for three tracking periods; this is being monitored by the Quality Improvement Team. An annual evaluation of PEF is included in the Education Service plan - Standards and Quality section. Page 217 of 268
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Recommendation Grading/Overall Opinion Definitions Recommendation Definition High Recommendations relating to factors fundamental to the success of the control objectives of the system. The weaknesses may give rise to significant financial loss/misstatement or failure of business processes. Medium Recommendations which will improve the efficiency and effectiveness of the existing controls. Low Recommendations concerning minor issues that are not critical, but which may prevent attainment of best practice and/or operational efficiency. Levels of Assurance Definition Substantial Assurance A sound system of governance, risk management and control exists, with internal controls operating effectively and being consistently applied to support the achievement of objectives in the area audited. Reasonable Assurance There is a generally sound system of governance, risk management and control in place. Some issues, non- compliance or scope for improvement were identified which may put at risk the achievement of objectives in the area audited. Limited Assurance Significant gaps, weaknesses or non-compliance were identified. Improvement is required to the system of governance, risk management and control to effectively manage risks to the achievement of objectives in the area audited. No Assurance Immediate action is required to address fundamental gaps, weaknesses or non-compliance identified. The system of governance, risk management and control is inadequate to effectively manage risks to the achievement of objectives in the area audited. Page 218 of 268
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Audit Committee Monday 25 November 2024 Item 5.5 Follow-Up Review of Completed Internal Audit Recommendations and Progress Update Duncan Stainbank, Chief Internal Auditor Report for Decision 1 Recommendations The Audit Committee is asked to: a) Note the results from the sample check of Internal Audit recommendations that have been marked as completed by Management in the period April 2023 to March 2024 to improve internal controls and governance, and mitigate risks; b) Acknowledge the progress made by Management in implementing Internal Audit recommendations to improve internal controls and governance, to mitigate risks, and consider whether it is satisfied with the progress made by Management; c) Considers whether it is satisfied with the outcomes or whether any further action is required; d) Endorse the proposal to extend the due dates for the overdue recommendations; and e) Note that Internal Audit will continue to monitor for completion the outstanding recommendations and will provide update reports to the Audit Committee. 2 Purpose of Report/Executive Summary The purpose of this report is to provide an update to members of the Audit Committee on the results of the Internal Audit Follow-up review which included a sample check on the adequacy of new internal controls for Internal Audit recommendations marked as completed by Management in the period April 2023 to March 2024. This report also provides an update to members of the Audit Committee on the status of the implementation by Management of audit recommendations made and agreed in Internal Audit reports. Internal Audit is an independent appraisal function established for the review of the internal control system as a service to Midlothian Council. It objectively examines, evaluates and reports on the adequacy of internal control as a contribution to the proper, economic, efficient and effective use of resources and the management of risk. The Internal Audit activity adds value to the organisation (and its stakeholders) when it considers strategies, objectives, and risks; strives to offer ways to enhance governance, risk management and control Page 219 of 268
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2 processes (by way of making audit recommendations); and objectively provides relevant assurance. The remit of the Audit Committee includes “To consider reports on the effectiveness of internal controls and monitor the implementation of agreed actions”, as part of its high-level oversight of the Council’s governance, risk management and control framework. Date 30 October 2024 Report Contact: Duncan Stainbank Chief Internal Auditor duncan.stainbank@midlothian.gov.uk Appendix 1: Overdue Actions Appendix 2: ‘In Progress’ Actions Page 220 of 268
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3 3 Background 3.1 Internal Audit is an independent appraisal function established for the review of the internal control system as a service to Midlothian Council. It objectively examines, evaluates and reports on the adequacy of internal control as a contribution to the proper, economic, efficient and effective use of resources and the management of risk. 3.2 The Internal Audit activity adds value to the organisation (and its stakeholders) when it considers strategies, objectives, and risks; strives to offer ways to enhance governance, risk management and control processes (by way of making audit recommendations); and objectively provides relevant assurance. 3.3 Management has the responsibility for ensuring that agreed audit actions are implemented to improve internal controls, risk management and governance. At Internal Audit final report stage, the audit recommendations are input to Ideagen Risk Management (formerly known as Pentana Risk), the Council’s corporate performance management system. This is designed to assist with Management tracking of implementation, link with relevant risks and evidence improvement. 3.4 Each year, Internal Audit undertakes two follow up reviews on the recommendations it has raised. The first checks a sample of Internal Audit recommendations which have been reported as complete and reviews the adequacy of the actions taken and improvements made. The second reports on the progress Management have made in implementing the recommendations by the expected date. 3.5 The remit of the Audit Committee includes “To consider reports on the effectiveness of internal controls and monitor the implementation of agreed actions”, as part of its high-level oversight of the Council’s governance, risk management and control framework. 4 Review of Completion of Internal Audit Recommendations 4.1 The objective of this follow-up audit was to review a sample of Internal Audit recommendations that have been signed off by Management as complete during the period 1 April 2023 to 31 March 2024 to assess the evidence that recommendations have been implemented satisfactorily and to ensure that the new controls had the desired effect on improving internal control and governance and reducing risk. 4.2 A sample of 33 audit recommendations (including 1 sub-action) which were at the ‘completed’ status on the Ideagen Risk Management system were selected and evidence was obtained to support the satisfactory completion of each recommendation. Recommendations from the following Internal Audit reports were selected: Page 221 of 268
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4 Financial Year Internal Audit Report No. High Rated Medium Rated Low Rated 2021/22 Learning Disabilities and Physical Disabilities including 1 sub-action 2 2 2022/23 Care at Home 6 1 5 2022/23 Construction Projects 8 5 3 2022/23 Justice Services 4 1 3 2022/23 Mental Health 3 2 1 2022/23 Purchasing Cards 3 3 2022/23 Utilities 3 3 2023/24 Licensing 3 3 2023/24 Council Tax Discounts and Exemptions 1 1 Total 33 0 9 24 4.3 From the 33 recommendations tested, 22 (67%) plus the sub-action, were found to have been completed satisfactorily, 7 (21%) were identified as partially satisfactory requiring further work, and 4 (12%) were not satisfactory. 4.4 For the audit recommendations that had been completed satisfactorily, the evidence that was provided by Management indicated that the action taken had the desired effect on improving internal control and governance and reducing risk. 4.5 For the 7 audit recommendations identified as partially satisfactory requiring further work: 5 were Low-rated and 2 were Medium-rated. Further work required for the 7 recommendations is detailed in the table below. Audit Recommendation Rating Further Work Required 1 2022/23 – Care at Home Written procedures should be implemented including how performance is measured (e.g. reports required to measure performance and rota efficiency). Low There are still some procedures that needs to be written up. 2 2022/23 – Care at Home Data quality issues with provider monitoring information should be addressed. QA monitoring should be in place for all providers including SDS Option 2. Audits undertaken should include an assurance risk rating and priority of the actions identified. Low SDS Option 2 audits have been undertaken but there are still some providers that have not been reviewed; and need more assurance around how hours delivered by SDS Options 2 providers are monitored. Monthly reports submitted by providers but lack of narrative around the statistics. 3 2022/23 - Mental Health The Strategic Improvement Plan for Children and Young People (CYP) Mental Health and Wellbeing needs to be formally agreed and implemented. Improvements are required over performance information relating to Medium CAMHS data to be presented to the next GIRFEC Board meeting. Page 222 of 268
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5 4.6 Of the 4 audit actions identified as not satisfied: 2 were Low-rated and 2 were Medium-related which are summarised in the table below: Audit Recommendation Rating 1 2022/23 – Care at Home A review of route efficiency and travel time should be undertaken. Every time the ratio actual time to planned is less than 70% or travel time is greater than 20% the circumstances should be reviewed to establish if more hours of care could be provided. Medium 2 2022/23 – Justice Services Petty cash controls require to be strengthened to ensure alignment with Council requirements. For example, management should ensure: • The use of disbursement logs, • The frequency of reconciliation is in line with the Council's risk appetite; and • Line manager responsibilities for checks on balances and reconciliation and top-up checks are completed and documented. The risks to staff health and safety when transporting cash between the Midlothian Council’s bank and the HSCP building require to be assessed. This can be made on monetary value. Good practice would see two officers transporting cash when it is of larger value. Medium providing wellbeing support service to CYP and obtaining more data from partners. 4 2022/23 - Mental Health Service Level Agreements (SLAs) and contracts should be signed by an authorised signatory. As part of the procurement evaluation, an audit trail should be maintained for the individual evaluation scores. Low SLAs need to be signed off by an authorised signatory or the authorised signatory system needs to be updated to allow managers to sign off SLAs. 5 2022/23 – Mental Health Monitoring of performance should be undertaken for all providers ensuring that all relevant performance templates are completed. The frequency of monitoring should be increased for higher value contracts. Contracts where providers are not meeting targets should be investigated and payments recovered for services not provided. Medium Performance templates need to be utilised within Children Services to ensure consistency across the performance information received from Providers. Within Health and Social Care, further clarification is required on one of the providers targets and the contract needs to be updated. 6 2022/23 – Utilities, Energy and Water Consumption The contract rates for the providers should be uploaded to Systems Link to provide assurance that the providers are adhering to the rates. In the interim, all relevant rates should be obtained from providers and evidence retained of sample checking. Low Advised that rates were uploaded onto systems link for 2024/25, but evidence of this upload couldn’t be provided. Will need to do sample and validation checks to ensure the rates are uploaded correctly. 7 2022/23 – Utilities, Energy and Water Consumption The rates applicable for electricity generated by the Council’s solar panels should be obtained annually from the provider. Additionally, the low electricity generation noted from a sample of panels should be reviewed and rectified as required. Low Rates obtained from the supplier but need to investigate the low electricity generated of some panels; and clarify the basis of the rates provided from the supplier. Page 223 of 268
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6 3 2022/23 – Justice Services A process should be developed to update the public contract register on a regular basis (at least quarterly). Contract renewal details for Cyrenians should also be updated on the public contract register. Low 4 2022/23 – Purchasing Cards The Procurement team should periodically carry out an analysis of the Council’s purchase card spend to identify opportunities for cost savings and to confirm ongoing compliance with Procurement Procedures. Low 4.7 Discussions have been held with the action owners to highlight what is required to ensure the remaining elements of the audit actions are fully completed or a sustained control is established. 11 audit actions have been re-opened on the Ideagen Risk Management system to enable the recommendation to be completed by the new agreed action date with evidence of the improvement action undertaken. 5 Progress Update 5.1 The objective of the second review is to assess Management’s reported performance in closing actions raised by Internal Audit by the agreed due date. It is Management’s responsibility to design and maintain adequate risk management, governance and internal control processes and checking that the arrangements and controls are operating effectively which are also known as the first and second lines. The quarterly performance monitoring process provides an opportunity for Management to have a discussion on all of the open audit actions, including those that are overdue, the reasons why they were not completed by the original due date, risk mitigations in place in the interim and requests to Internal Audit for extensions to due dates. 5.2 An Internal Audit action report was generated from the Ideagen Risk Management system on 28 October 2024 which reflected the Quarter 2 updates 2024/25. 10 actions were overdue and 148 actions (including sub-actions) were in progress which are summarised as follows: Financial Year Action Status High Medium Low Total 2018/19 In Progress 2 1 1 4 2019/20 In Progress 1 1 5 7 2020/21 In Progress 2 5 3 10 Overdue 0 2 0 2 2021/22 In Progress 3 12 8 23 Overdue 0 0 3 3 2022/23 In Progress 0 16 20 36 Overdue 0 2 1 3 2023/24 In Progress 1 26 32 59 Overdue 0 2 0 2 Consultancy Not rated 9 Total 9 67 73 158 5.3 The 10 overdue actions are summarised in Appendix 1. The due dates for these are now to be extended to 31 March 2025 in the Ideagen Risk Page 224 of 268
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7 Management system, which will allow management to take further action to complete the recommendations within a reasonable time. CMT are in support of this proposal and the Audit Committee are asked to endorse this proposal. 5.4 The 148 audit actions in progress are summarised in Appendix 2 which highlights the number of audit actions in progress within each Directorate. 5.5 This report was prepared for presentation to the Audit Committee on 25 November 2024. The progress on implementation of Internal Audit recommendations has been discussed with the Corporate Management Team on 6 November 2024. 5.6 A further update on progress with the implementation of Internal Audit recommendations will be included within the Internal Audit Annual Assurance Report 2024/25 for Midlothian Council which is scheduled for presentation to the Audit Committee in June 2025. 6 Report Implications (Resource, Digital, Risk and Equalities) 6.1 Resource Resource implications of implementing Internal Audit recommendations are considered as part of the audit process to ensure these are reasonable and proportionate to the risks. 6.2 Digital There are no digital implications arising from this report. 6.3 Risk The recommendations made by Internal Audit are designed to reduce the level of risk to which the Council is exposed through the strengthening of the control environment and management of risks. It is anticipated that improvements in the management and mitigation of risks will arise as a direct result of Management implementing the Internal Audit recommendations made. If audit recommendations are not implemented, there is a greater risk of financial loss and/or reduced operational efficiency and effectiveness, and Management may not be able to demonstrate improvement in internal control and governance arrangements, and effective management of risks. 6.4 Ensuring Equalities This report does not relate to a new or revised policy, service or budget change, which affects people (the public or staff), so an Integrated Impact Assessment (IIA) is not an applicable consideration. The Internal Audit work is carried out in accordance with the appropriate legislation and professional standards. The latter includes compliance by those within the Internal Audit function with the Code of Ethics set Page 225 of 268
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8 out in the PSIAS which is appropriate for the profession of Internal Audit founded as it is on trust placed in its independent and objective assurance about risk management, internal control and governance. 6.5 Additional Report Implications (See Appendix A) Page 226 of 268
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9 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Although this report does not relate directly to the key priorities within the Single Midlothian Plan to which Midlothian Council and its Community Planning Partners have made a commitment (Reducing the gap in economic circumstances; Reducing the gap in learning outcomes; Reducing the gap in health outcomes; and Reducing the impact of climate change), good governance is important to enable Midlothian Council to deliver its key priorities in support of achieving the Council’s objectives. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above Midlothian Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is applicable to the Council’s Internal Audit service provision to assist the Council in achieving its objectives. A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The definition of Internal Auditing within the Public Sector Internal Audit Standards (PSIAS) is “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” Page 227 of 268
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10 Implementation by Management of the actions associated with Internal Audit recommendations, that are designed to improve internal control and governance arrangements and management of risks, underpins the Council’s own continuous improvement arrangements to enhance its effectiveness, thus supporting the delivery of the Council’s best value duties. A.5 Involving Communities and Other Stakeholders The Chief Internal Auditor is accountable to the Audit Committee which, in fulfilling its governance role, acts as a bridge between the Council and other stakeholders. This report is presented to the Audit Committee to fulfil its remit “monitor the implementation of agreed actions”, as part of its high-level oversight of the Council’s governance, risk management and control framework. This report has been presented to the Corporate Management Team to outline the key messages of assurance and areas of improvement. The implementation of Audit recommendations will continue to be tracked by Management using the Ideagen Risk Management system. system and followed-up by Internal Audit. Any further matters of concern will be raised to CMT and the Audit Committee as appropriate. A.6 Impact on Performance and Outcomes The Findings and Recommendations from Internal Audit work during the year are designed to assist the Council in improving its performance and outcomes. A.7 Adopting a Preventative Approach Internal Audit assurance work includes assessments on when a preventative approach can be adopted. A.8 Supporting Sustainable Development This report does not relate directly to supporting sustainable development. Good governance is important to enable Midlothian Council to achieve its objectives. Page 228 of 268
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Appendix 1 Internal Audit Performance Report – Overdue Actions Status: Overdue 10 2020/21 - Devolved School Management (DSM) budgets - Limited Assurance Action Code Action Due Date Icon Progress Notes Service Managed By IA.DSMB.01 The new DSM scheme currently being developed should redress inequalities inherent in the application of the current DSM scheme and ensure that allocations consistently and reliably reflect school contexts and the growth across Midlothian. 31-Mar- 2024 80% Q4 23/24: On Target The DSM has been developed and rolled out for mainstream and early years. The work on the ASN DSM is underway. Due Date Aug 2024. Education Marc *Bedwell; Sinead Urquhart IA.DSMB.02 Clear boundaries in the new DSM scheme should be set and reinforced through awareness training and monitoring of expenditure to ensure that the use of funds clearly supports schools’ objectives. Head Teachers would benefit from raising awareness of DSM. 31-Mar- 2024 80% Q4 23/24: Off Target Embedding the DSM is an ongoing activity throughout the year and as we make updates to the DSM scheme. Education Marc *Bedwell; Sinead Urquhart 2021/22 - Income Collection - Substantial Assurance Action Code Action Due Date Icon Progress Notes Service Managed By IA.INCOME. 02 The reporting facility within Parent-Pay should be utilised. Schools should ensure that all payments are recorded on the system and encourage parents to sign up to Parent-Pay. Further training to schools on the use of the system, including reconciling online payments, should be provided. 31-Mar- 2024 90% Q2 23/24: New target date agreed by Internal Audit - 31/03/2024 Education; Education Resources ED/CSPC Performance Officer Page 229 of 268
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2021/22 - Learning Disabilities and Physical Disabilities - Substantial Assurance for overall governance, Limited Assurance for commissioning arrangements and contract monitoring arrangements Action Code Action Due Date Icon Progress Notes Service Managed By IA.LDPD.01. 2 CS Children Services (CS) - Policies and Procedures relating to Learning Disabilities and Physical Disabilities should be reviewed and updated and should be available on the intranet. 31-Mar- 2024 85% Q1 24/25: Off Target This informs the 2024/25 strategic disability plan. Extension being negotiated with Audit. This will be taken on by the new Service Manager (Disability) when they start in post in September. Childrens Services, Partnership and Communities Jo *Foley IA.LDPD.05 Within Children Services, provider’s performance reports and meetings should be reinstated and adequate resource should be provided to support the quality assurance process. 31-Mar- 2024 85% Q1 24/25: Off Target These actions are linked to procurement availability and staffing issues, new reporting template in place with providers. Better at getting individual Placement agreements in place (IPA). Extension to deadline being negotiated with Audit. This will be taken on by the new Service Manager (Disability) when they start in post in September. Childrens Services, Partnership and Communities Jo *Foley 2022/23 - Mental Health Services - Substantial for budget monitoring and partnership working. Limited for contract monitoring; and compliance with procurement regulations and the Council’s FTPP policy Action Code Action Due Date Icon Progress Notes Service Managed By IA.MH.01 Management should ensure that they are compliant with Following the Public Pound (FTPP) guidance: Service Level agreements (SLAs) should be in place and updated if there is a variation in the agreement; SLAs should be signed by an authorised signatory, risk assessments should be completed for large grants, and financial checks for large grants should be undertaken. 31-Mar- 2024 0% Education ED/CSPC Performance Officer Page 230 of 268
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Action Code Action Due Date Icon Progress Notes Service Managed By Grant application forms should be updated to ensure compliance with relevant legislation (eg the Data Protection Act 2018, Freedom of Information Act 2002 and Subsidy Control Act 2022.) IA.MH.05 EDU Education Services (EDU) - Monitoring of performance should be undertaken for all providers ensuring that all relevant performance templates are completed. The frequency of monitoring should be increased for higher value contracts. Contracts were providers are not meeting targets should be investigated and payments recovered for services not provided. 31-Mar- 2024 0% ED/CSPC Performance Officer; Education Sinead Urquhart 2022/23 - Performance Management & Performance Indicators - substantial in relation to the reporting of PIs - limited for the implementation of the recommendations from the audit of Performance Management (LGBF) undertaken in 2021 Action Code Action Due Date Icon Progress Notes Service Managed By IA.PERFOR MANCE- MGT- IND.01b - Children, Young People & Partnership s Services should be reminded of the performance measure controls they should have in place when calculating statutory & non-statutory PIs such as: retain an audit trail of source documentation; create procedure notes to enable PIs to be produced in the absence of key individuals; and undertake quality assurance checks for the calculation of PIs. 31-Mar- 2024 80% Q2 23/24: New target date agreed by Internal Audit - 31/03/2024 Education ED/CSPC Performance Officer; Marc *Bedwell; Sinead Urquhart 2023/24 - Risk Management - Substantial for Risk Management Policy and application at a strategic level. Limited over the application of the Risk Management Policy at the service level, training, guidance, and service level reporting and monitoring. Action Code Action Due Date Icon Progress Notes Service Managed By IA.RISK.04. CHILDREN' SSERVICES Chief Officers and Head of Service should ensure that their service risk registers are 30-Sep- 2024 75% Q1 24/25: On Target An audit and review of Risk has Childrens Services, Partnership and Communities Childrens Services Management Team Page 231 of 268
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Action Code Action Due Date Icon Progress Notes Service Managed By appropriately updated by relevant managers. Service risks should be reported to DMTs and escalated as required to CMT and the Strategic Risk Register. commenced, updated risk registers planned for Q2 24/25. Risks have been reviewed new risk register has been drafted for Q2. IA.RISK.04. EDUCATION Chief Officers and Head of Service should ensure that their service risk registers are appropriately updated by relevant managers. Service risks should be reported to DMTs and escalated as required to CMT and the Strategic Risk Register. 30-Sep- 2024 0% Q4 23/24: On Target An audit and review of Risk has commenced, updated risk registers planned for Q2 24/25. Education Chief Operating Officer *Education Page 232 of 268
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Appendix 2 Internal Audit Performance Report – Actions in Progress Status: In Progress 148 Financial Years Areas Total Place Corporate Solutions Children, Young People and Partnership Health and Social Care 2018/19 1 3 0 0 4 2019/20 1 6 0 0 7 2020/21 10 0 0 0 10 2021/22 15 3 0 5 23 2022/23 20 6 3 7 36 2023/24 23 27 12 6 68 Total 70 45 15 18 148 Page 233 of 268
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Audit Committee Monday 25 November 2024 Item 5.6 Audit Scotland Report: The National Fraud Initiative in Scotland 2024 Report by Chief Internal Auditor Report for Information 1 Recommendations The Audit Committee is asked to acknowledge the Audit Scotland Report: The National Fraud Initiative in Scotland 2024. 2 Purpose of Report/Executive Summary The purpose of the report is to make the Audit Committee aware of recently published Audit Scotland: The National Fraud Initiative in Scotland 2024; the input provided by the Midlothian Council Counter Fraud team and the ongoing actions being taken to continue to prevent and detect fraud through the National Fraud Initiative. Having robust fraud prevention and investigation arrangements in place contributes to safeguarding the Council’s financial resources, for delivery of services, as part of protecting the public purse. A focus on enhancing fraud prevention and detection to improve the Council’s resilience to the risk of fraud, theft, corruption and crime, and ensure these are embedded preventative practices are specific changes associated with the Counter Fraud Strategy. Date 1 November 2024 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 235 of 268
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2 3 Background 3.1 Having robust fraud prevention and investigation arrangements in place contributes to safeguarding the Council’s financial resources, for delivery of services, as part of protecting the public purse. A focus on enhancing fraud prevention and detection to improve the Council’s resilience to the risk of fraud, theft, corruption and crime, and ensure these are embedded preventative practices are specific changes associated with the Counter Fraud Strategy. 3.2 The following report on the National Fraud Initiative in Scotland 2024 has been recently published by Audit Scotland. The National Fraud Initiative in Scotland 2024 | Audit Scotland The report highlights that the National Fraud Initiative (NFI) takes place every two years and operates across the UK public sector and includes 110 public bodies in Scotland. The counter-fraud exercise aims to prevent and detect fraud, submits data and details the outcomes from the 2022-23 exercise in Scotland. The NFI in Scotland 2024 report highlighted the following significant outcomes: • £21.5 million in fraud and payment errors across the Scottish public sector, increasing from £14.9million in 2020/21 • £4.5 million was saved through Council tax discounts by removing ineligible claims, down from £4.6 million in 2020/21 • £1.2 million in housing benefit overpayments were identified and stopped • £1.5 million was preserved in occupational pensions by discontinuing payments to individuals who had passed away Increased outcomes reported in 2022/23 partly reflect improvement in recording of results as bodies continue to recover from Covid-19. There have also been changes to estimation methodologies which contribute to higher outcomes in some areas. It is not possible to extrapolate from these figures that underlying levels of fraud have increased. 3.3 The Midlothian Audit Committee had the outcomes reported in the Counter Fraud Annual report to the June 2024 Audit Committee highlighting the £444,000 of fraud and payment errors included within the overall NFI results. The Counter Fraud team has also co-ordinated with Council Services and providers to submit the data for the 2024/25 NFI exercise and initial matches from this exercise will be available to commence work during December 2024. Page 236 of 268
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3 4 Report Implications (Resource, Digital, Risk and Equalities) 4.1 Resource The Integrity Group will support Management across the Council with counter fraud management by: overseeing the review of the counter fraud policy framework in line with best practice; highlighting emerging fraud and corruption risks, threats, vulnerabilities; agreeing fraud and corruption mitigation actions; raising awareness of bribery, fraud and corruption in the Council as a method of prevention; meeting during the course of fraud investigations with the aim to take corrective action, minimise losses and help prevent further frauds. 4.2 Digital None. 4.3 Risk The Council is committed to minimising the risk of loss due to fraud, theft, corruption or crime and to taking appropriate action against those who attempt to defraud the Council, whether from within the authority or from outside. The Counter Fraud Policy Statement sets out the roles and responsibilities for the prevention, detection and investigation of fraud. The Counter Fraud Strategy provides a shift in approach to focus on enhancing fraud prevention and detection to improve Midlothian Council’s resilience to the risk of fraud. The steer provided by the Integrity Group and the work undertaken by the Corporate Fraud Team in collaboration with other Services is designed to reduce the fraud risks within the Council. 4.4 Ensuring Equalities An Integrated Impact Assessment (IIA) Form was completed prior to the presentation of the revised Counter Fraud Policy and Strategy that were approved by the Council on 25 August 2020. 4.5 Additional Report Implications (See Appendix A) Page 237 of 268
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4 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Although this report does not relate directly to the key priorities within the Single Midlothian Plan (Reducing the gap in economic circumstances; Reducing the gap in learning outcomes; Reducing the gap in health outcomes; and Reducing the impact of climate change) by preventing and detecting fraud, additional resources might be available to support the Council’s objectives. Any loss of funds due to fraud, theft, corruption or crime might impact on the ability of the Council to achieve its key priorities. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above The Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is applicable to the Council’s arrangements for tackling fraud as set out in the Counter Fraud Policy Statement and Counter Fraud Strategy. The shift to the key drivers for change is an intrinsic part of the proposed change in approach and culture for the Council for tackling fraud and corruption. For example: (a) The formal establishment of an Integrity Group with a Terms of Reference (approved by the Audit Committee on 22 June 2020) shifting to more holistic working in multi-disciplinary forums to tackle fraud in a consistent and collaborative way across the Council; (b) A focus on enhancing fraud prevention and detection to improve the Council’s resilience to the risk of fraud, theft, corruption, and crime and ensure these are embedded preventative practices; (c) Applying the minimum standard within the CIPFA Code of Practice on ‘Managing the Risk of Fraud and Corruption (2014)’ for counter fraud policy, strategy and other practices, and adopting the CIPFA Counter Fraud Maturity Model as a means of self-assessment moving forward will enable continuous improvement to be evaluated, managed and evidenced; and (d) Use of a blend of toolkits such as fraud vulnerability assessments and e-learning packages that can be tailored to specific Services. Page 238 of 268
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5 A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value Having robust fraud prevention and investigation arrangements in place contributes to safeguarding the Council’s financial resources, for delivery of services, as part of protecting the public purse. The Counter Fraud Strategy states the Council will measure progress against the CIPFA Counter Fraud Maturity Model as a self-assessment approach to continuous improvement in order to be evaluated, managed and evidenced to demonstrate best value in the use of resources. A.5 Involving Communities and Other Stakeholders Ensuring awareness of the Whistleblowing facility to report areas of concern is important in the approach to tackling fraud. The facility has been promoted in recent years and is being utilised by staff, those within communities or other stakeholders. A.6 Impact on Performance and Outcomes The primary responsibility for the prevention, detection and investigation of fraud rests with Management, supported by the Corporate Fraud team. Internal Audit provides advice and independent assurance on the effectiveness of processes put in place by Management. The Findings and recommendations from Internal Audit and Corporate Fraud work which are presented to the Audit Committee during the year assists the Council in maintaining and / or enhancing fraud prevention and detection controls. A.7 Adopting a Preventative Approach Having robust fraud prevention and investigation arrangements in place contributes to safeguarding the Council’s financial resources, for delivery of services, as part of protecting the public purse. A focus on enhancing fraud prevention and detection to improve the Council’s resilience to the risk of fraud, theft, corruption and crime, and ensure these are embedded preventative practices are specific changes associated with the Counter Fraud Strategy. A.8 Supporting Sustainable Development None. Page 239 of 268
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Prepared by Audit Scotland August 2024 The National Fraud Initiative in Scotland 2024 Page 241 of 268
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2The National Fraud Initiative in Scotland 2024 Contents Key messages 3 Recommendations 4 1. Introduction 5 2. Overall outcomes 7 3. NFI delivery 11 4. Specific match areas 14 5. Pilot exercises and future developments 25 Appendix 26 Accessibility You can find out more and read this report using assistive technology on our website www.audit.scot/accessibility. Audit team The core audit team consisted of: Tim Bridle, under the direction of Cornilius Chikwama. Page 242 of 268
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3Key messages Key messages Key messages Key messages 1 Fraud against the public sector costs the taxpayer money and can undermine both confidence in government and the delivery of public services. The proactive detection and prevention of fraud using the National Fraud Initiative (NFI) remains vitally important to public sector financial management as public bodies continue to recover from Covid-19 and to deal with the impact of the cost-of-living crisis. 2 NFI savings and outcomes have increased from £14.9 million in 2020/21 to £21.5 million in 2022/23, with increases across most data match areas. However, savings from council tax single person discounts are slightly reduced and additional outcomes in some areas are attributable to changes in estimation methodologies. Overall, it is not clear whether underlying levels of fraud have increased since 2020/21. 3 NFI governance and follow-up arrangements remained sound for most participating bodies over the period covered by the 2022/23 exercise. However, when compared to previous exercises, slightly fewer bodies have been assessed by their auditors as having fully satisfactory arrangements, and there remains scope for some bodies to follow up on data matches more effectively. Page 243 of 268
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4Recommendations Recommendations Participating bodies should: • Ensure that an appropriate level of resource is available to deliver NFI follow-up activities in an efficient and effective manner, in line with local priorities. • Use the NFI Self-Appraisal Checklist as part of planning for the 2024/25 exercise. • Put in place arrangements for monitoring follow-up activity, and where it is necessary seek to understand reasons for low or nil outcomes. Page 244 of 268
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5 1. 1. Introduction 1. Introduction The proactive detection and prevention of fraud using the National Fraud Initiative (NFI) remains vitally important to public sector financial management as public bodies continue to recover from the Covid-19 pandemic and to deal with the impact of the cost-of-living crisis. 1. Fraud against the public sector costs the taxpayer and can undermine both confidence in government and the delivery of public services. The National Fraud Initiative (NFI) is a proactive data matching exercise designed to identify and prevent fraud. It remains vitally important during a time of ongoing financial pressure as public bodies continue to recover from the Covid-19 pandemic and to deal with the impact of the cost-of- living crisis. 2. The Public Sector Fraud Authority (PSFA) oversees the NFI across the UK, and Audit Scotland leads the exercise in Scotland, working with a range of Scottish public bodies and their external auditors. The NFI takes place every two years, and this report considers the outcomes from the 2022/23 exercise. Statutory basis for NFI 3. We carry out the NFI under powers introduced by the Criminal Justice and Licensing (Scotland) Act 2010 and incorporated in Part 2A of the Public Finance and Accountability (Scotland) Act 2000. It is important for all parties involved that this exercise is properly controlled, and that data is handled in accordance with the law. The Audit Scotland Code of Data Matching Practice includes a summary of the key legislation and controls governing the NFI data matching exercise. Participating bodies 4. In 2022/23, 110 public sector bodies in Scotland participated in the NFI, submitting data and following up on matches. The Scottish Government also submitted data for another 17 central government bodies who share their systems for payroll and/or creditors. Many councils also submit payroll data for their Arm’s-Length External Organisations (ALEOs). Across the UK there are over 1,100 participating bodies and data matching takes place across them all. Page 245 of 268
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1. Introduction 6 Main data match areas in 2022/23 5. The main data match areas for the 2022/23 NFI exercise were: • Payroll • Creditor payments • Council Tax (Single Person Discounts and Reduction Scheme reliefs) • Pensions • Housing Benefit • Housing Tenancy and waiting lists • Blue Badges (disabled parking) • Adult concessionary bus travel (new in 2022/23 exercise). 6. The 2022/23 NFI exercise matched new data from His Majesty’s Revenue and Customs (HMRC) using powers under the Digital Economy Act (2017). 7. Non-Domestic Rates Small Business Bonus Scheme (NDR SBBS) matching was postponed for the 2022/23 exercise due to the national NDR revaluation exercise in 2023. Results will be reported as part of the 2024/25 exercise. Basis for reported outcomes 8. All monetary outcomes included in this report are on a cash basis, prior year totals have not been adjusted to reflect inflation or changes in estimation methodologies since amounts were originally reported. Details of estimate methodologies used can be found at Appendix. Page 246 of 268
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72. Overall outcomes 2. Overall outcomes Overall outcomes from the NFI have increased from £14.9 million in 2020/21 to £21.5 million in 2022/23. Overall outcomes by type 9. The value of outcomes from the NFI, recorded since our last report, total £21.5 million (up from the £14.9 million in 2022). The cumulative value of outcomes from the NFI in Scotland since participation started in 2006/07 now stands at around £180 million. Exhibit 1 shows NFI outcomes by type for 2022/23 and the previous three exercises. Exhibit 1. NFI outcomes by exercise and type, 2016/17 to 2022/23 Reported outcomes have increased to £21.5 million in 2022/23. Source: Audit Scotland analysis of NFI outcomes 0 10 25 2022/232020/212018/192016/17 £ million £17.8m £15.3m £14.9m £21.5m 3.1 2.7 4.2 6.8 9.2 7.0 6.2 8.9 5.5 5.6 4.5 5.7 Actual savings: overpayments and additional income Forward savings estimates: from overpayments, additional income and prevented fraud Notional outcome estimates: not directly linked to actual overpayments or additional income, eg blue badges, housing tenancy and waiting lists 10. Increased outcomes reported in 2022/23 partly reflect improvement in recording of results as bodies continue to recover from Covid-19. There have also been changes to estimation methodologies which contribute to higher outcomes in some areas (details of methodologies can be found in the Appendix). It is not possible to extrapolate from these figures that underlying levels of fraud have increased. Page 247 of 268
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2. Overall outcomes 8 Outcomes by data match area 11. Most monetary outcomes from the NFI accrue to councils, the Scottish Public Pensions Agency and the Department for Work and Pensions (DWP) in the form of savings arising from council tax, pensions and housing benefits matches. 12. Many participating bodies only submit payroll and creditors datasets for matching, and this limits the monetary outcomes available to them. However, overpayments associated with duplicate creditor payments and payroll matches are not insignificant. NFI outcomes analysed by main data match area, are shown for the last three exercises in Exhibit 2 (page 9). Page 248 of 268
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2. Overall outcomes 9 Exhibit 2. NFI outcomes by area and exercise Most savings arise from Council Tax, Pensions and Housing Benefits matches. Notional outcome estimates Forward savings estimates Overpayments and additional income 0 1 2 3 4 5 6 Care Home Payments Payroll Concessionary Bus Travel Creditors Housing waiting lists Council Tax Reduction Scheme Housing Tenancy Housing Benefit Pensions Non-Domestic Rates Blue Badges Council Tax SPD Care Home Payments Payroll Concessionary Bus Travel Creditors Housing waiting lists Council Tax Reduction Scheme Housing Tenancy Housing Benefit Pensions Non-Domestic Rates Blue Badges Council Tax SPD Care Home Payments Payroll Concessionary Bus Travel Creditors Housing waiting lists Council Tax Reduction Scheme Housing Tenancy Housing Benefit Pensions Non-Domestic Rates Blue Badges Council Tax SPD £ million 2020/21 2018/19 2022/23 Page 249 of 268
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2. Overall outcomes 10 Notes: 1. Non-Domestic Rates Small Business Bonus Scheme data was first submitted for the 2020/21 exercise but did not form part of the 2022/23 exercise due to the revaluation exercise taking place in 2023. 2. Care home payments have not been matched since 2018/19 due to legislative constraints. 3. Adult concessionary bus travel was a pilot exercise in 2020/21 and has been mainstreamed in 2022/23. Source: Audit Scotland analysis of NFI outcomes Wider benefits of NFI 13. The NFI also delivers benefits which are more difficult to quantify. These include its fraud deterrent effect and the financial governance assurance it provides to bodies where no issues are identified (Exhibit 3). Exhibit 3. Non-monetary benefits of NFI Source: Audit Scotland Acts as a deterrent to potential fraudsters Can provide assurance that systems are operating well Can identify where system improvements are required Page 250 of 268
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113. NFI delivery 3. NFI delivery NFI governance and follow-up arrangements remain sound for most participating bodies. However, when compared to previous exercises, appointed auditors assessed slightly fewer bodies as having fully satisfactory arrangements. Auditor assessments 14. NFI governance and follow-up arrangements remain sound for most of the 110 bodies in Scotland that participated in the 2022/23 exercise. However, several bodies have struggled with delivery and there remains some scope for improvement. 15. We asked auditors to assess participating body NFI arrangements, and rate them as Green (satisfactory), Amber (mostly adequate) or Red (unsatisfactory). Auditor returns for 2022/23 included a slightly increased number of amber and red ratings Exhibit 4 (page 12). 16. In most cases amber or red assessments reflect deficiencies with follow-up activity. Participating bodies routinely cited the lack of adequate resources as the main reason for delay or lack of progress with follow-up activity. 17. Our NFI Self-Appraisal Checklist includes requirements for participating bodies to consider Leadership, Commitment and Communication. The checklist also asks NFI key contacts and users to consider potential improvements to the efficiency and effectiveness of follow-up activity. The checklist can be found on our Counter Fraud webpage and has been updated for the 2024/25 exercise. Page 251 of 268
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3. NFI delivery 12 Exhibit 4. Auditor assessments of NFI delivery arrangements Amber and red assessments were up slightly in 2022/23. Source: Audit Scotland analysis of Auditor Returns Percentage Satisfactory Mostly adequate Unsatisfactory 0 10 20 30 40 50 60 70 80 90 100 Colleges 2022/23 Colleges 2020/21 Colleges 2018/19 CG 2022/23 CG 2020/21 CG 2018/19 NHS 2022/23 NHS 2020/21 NHS 2018/19 LG 2022/23 LG 2020/21 LG 2018/19 Page 252 of 268
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3. NFI delivery 13 18. Exhibit 5 shows the main determinants of successful NFI delivery that participating bodies should be focusing on to strengthen their arrangements. Exhibit 5. NFI participation – main determinants of success Successful delivery of NFI requires a clear commitment to a well-thought-out approach that optimises the use of available resources to follow up matches appropriately. Source: Audit Scotland 19. Audit Scotland will continue to work with bodies to support effective and efficient delivery of NFI through its ongoing engagement activities. Knowledge Resources Leadership Effective NFI delivery Page 253 of 268
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144. Specific match areas 4. Specific match areas NFI outcomes have increased in most data match areas in 2022/23. However, savings from council tax single person discounts decreased slightly, and increases in some areas are partly due to changes in estimation methodologies. Payroll 20. The number of payroll and multi-contract working frauds identified as a result of the NFI has increased. There were 12 cases identified in 2022/23. This is the highest number since 2016/17, which is the last exercise for which immigration data was matched. Overpayments and case numbers for the 2022/23 exercise are shown alongside those for the three previous exercises at Exhibit 6. Exhibit 6. Payroll outcomes and case numbers by NFI exercise There has been an increase in the level of identified fraud in 2022/23. Note. Notional outcomes of £5,685 per case are allocated where staff resign or have been dismissed (Appendix). Source: NFI management information 0 80 140 2022/232020/212018/192016/17 0 8 16 2022/232020/212018/192016/17 Number of cases Overpayments £ thousand 13 8 3 12 £20,000 £129,000 £27,000 £100,000 Notional outcomes Page 254 of 268
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4. Specific match areas 15 Creditor payments 21. Participating bodies submit details of payments made to people or organisations supplying them with goods and services. Data is matched by the NFI to identify potential duplicate payments. Bodies identifying duplicate payments often refresh procedures and tighten controls to reduce future risk. 22. In 2022/23 outcomes worth £0.75 million were identified from 146 duplicate payments across 31 bodies. This is broadly in line with previous exercises as shown in Exhibit 7. Exhibit 7. Duplicate creditor payment savings and case numbers by NFI exercise £0.75 million of recoverable duplicate creditor payments was identified in 2022/23. Source: NFI management information 0 0.6 1.2 2022/232020/212018/192016/17 Number of duplicate payments Overpayments £ million 168 147 144 146 £0.6m £1.1m £0.5m £0.75m 130 150 170 2022/232020/212018/192016/17 Page 255 of 268
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4. Specific match areas 16 Adult Concessionary Bus Travel 23. Following a successful pilot exercise in 2020/21, adult concessionary bus travel mortality screening was rolled out to councils in 2023. The National Entitlement Card Project Office, working in partnership with councils, submitted details of all live travel passes for matching. 24. The NFI identified 99,600 travel passes that belonged to holders who had died. Transport Scotland was able to check usage of these passes and identified that 1,075 had been used after the date of death. 25. The full fare value of fraudulent bus trips associated with these passes amounted to £0.31 million, with a cost to Transport Scotland of around £0.18 million, based on the applicable reimbursement rates to bus companies. 26. The cancellation of these passes will prevent future fraudulent use with an estimated value of £0.45 million (based on £420 per travel pass used fraudulently, see Appendix (page 26). The resultant saving to Transport Scotland is estimated at around £0.25 million based on current reimbursement rates.1 Council Tax Single Person Discounts 27. People living on their own, or in some cases with adults who can be ‘disregarded’, are eligible for a 25 per cent single person discount (SPD) on their annual council tax bill. The NFI matches SPD recipients to the electoral register and to other datasets to identify where other adult residents have not been declared on applications, have subsequently turned 18 or have moved in. 28. Councils withdrew £1.8 million worth of SPDs because of the NFI. The additional income, based on a forward projection of annual savings for two years, in line with the Cabinet Office methodology, equates to an additional £2.7 million. These amounts are shown together and alongside savings for the previous three exercises in Exhibit 8 (page 17). 29. Only 19 councils recorded NFI activity in relation to SPDs, as more councils are now making use of third party providers for data matching and follow-up. Seven councils using third-party providers now record no NFI outcomes (an increase of two from the previous exercise). 1 Total outcomes for this area (Exhibit 2) includes a notional amount of £0.91 million relating to the pilot exercise in 2020/21 (based on the Cabinet Office methodology at the time which applied £550 to each travel pass cancelled). Page 256 of 268
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4. Specific match areas 17 Exhibit 8. Council Tax SPD savings and case numbers by NFI exercise Case numbers and savings from single person discounts decreased in 2022/23. Source: NFI management information Thousand 4,846 4,588 3,720 3,419 1.8 2.6 2.7 Case numbers0 3 6 2022/232020/21 2018/19 2016/17 0 3 6 2022/232020/212018/192016/17 £4.4m £4.9m £4.6m £4.5m 3.1 1.8 2.8 1.5 2.9 1.7 2.7 1.8 Forward savings estimate Discounts removed £ million Council Tax Reduction Scheme (CTRS) 30. Council tax reduction is available to low-income households in Scotland. The NFI matches CTRS data to other datasets, such as payroll and pensions, for example, to identify undeclared income. 31. In 2022/23, additional council tax income of £0.92 million was identified because of follow-up on NFI matches (up from £0.65 million in 2020/21). Savings and case numbers are shown alongside those from the previous three NFI exercises in Exhibit 9 (page 18). Page 257 of 268
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4. Specific match areas 18 32. Actual additional income from the removal of council tax reductions has increased, as have forward savings estimates. The forward savings estimate methodology has, however, changed with savings now based on 33 weeks, compared to the 21 weeks previously used. Exhibit 9. Council Tax Reduction Scheme savings and case numbers by NFI exercise Total potential savings from CTRS have increased to £0.92 million in 2022/23. Source: NFI management information 115 280 772 395 Case numbers0 400 800 2022/23 2020/212018/192016/17 0.0 0.5 1.0 2022/232020/212018/192016/17 £0.48m £0.30m £0.65m £0.92m 0.08 0.23 0.09 0.38 0.12 0.53 0.23 0.69 Forward savings estimate Reductions removed £ million 33. Only 18 councils identified savings from CTRS, with most savings arising from matches to pensions (around 40 per cent) and payroll (around 30 per cent), where income had not been declared. Page 258 of 268
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4. Specific match areas 19 Housing Benefits 34. Housing benefits (HB) help people on low incomes pay their rent. HBs in payment continues to decrease as more benefit recipients move on to universal credit. 35. The DWP’s Verify Earnings and Pensions alerts service has also impacted HB savings from NFI as alerts are sent directly to councils for investigation, allowing them to follow up outside the NFI process. We no longer match HB to payroll and pension as part of the NFI. 36. There has, however, been an increase in reported savings in 2022/23 due to the inclusion of late DWP savings from the 2020/21 exercise which was affected by Covid-19. Exhibit 10 shows the HB overpayments and forward savings reported for the current and previous three NFI exercises. Exhibit 10. Housing Benefit savings by NFI exercise 2022/23 includes significant late DWP savings from the 2020/21 exercise. Source: NFI management information 0.0 1.5 3.0 2022/232020/212018/192016/17 £2.1m £2.8m £1.2m £2.2m 2.1 0.7 1.4 0.7 0.3 0.9 0.4 1.8 Forward savings estimate Overpayments £ million 37. HB matches involving suspected fraud are referred to the DWP for investigation and resultant savings are not attributed back to councils. In 2022/23 almost £2 million of savings arose from these referrals. £0.2 million of savings was identified locally by 17 councils, largely from the follow-up of matches to student loans. Page 259 of 268
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4. Specific match areas 20 Exhibit 11. Pensions savings by NFI exercise Follow-up activity and recording of outcomes in 2020/21 was impacted by Covid 19. Source: NFI management information 0 3 6 2022/232020/212018/192016/17 £5.4m £3.2m £1.5m £5.6m 2.8 0.40.7 4.8 0.1 1.4 5.1 0.5 Estimated forward savings Actual overpayments £ million Pensions 38. The NFI is an efficient and effective way for the Scottish Public Pensions Agency (SPPA) and councils that administer pensions to check that they are only paying pensions to people who are alive. 39. The follow-up of matches has led to the identification of actual overpayments of £0.5 million as at 31 March 2024, with projected forward savings amounting to a further £5.1 million. These savings are shown along with those reported for previous exercises in Exhibit 11. 40. Forward savings are estimated based on a potential payment period from the date overpayments are identified until the date the deceased pensioner would have reached the age of 85 (consistent with actuarial assumptions used to value public sector pension schemes). 41. In 2022/23 we have seen improved follow-up of pensions matches. However, not all overpayments identified had been recorded by 31 March 2024. Late savings will be reported as part of the 2024/25 exercise as a result. Page 260 of 268
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4. Specific match areas 21 Exhibit 12. Blue Badges outcomes and case numbers by NFI exercise There have been higher levels of recorded cancellation in 2022/23 than for recent exercises. Source: NFI management information 0.0 2.0 4.0 2022/232020/212018/192016/17 Badges cancelled Notional outcomes £ million Thousand 4,505 3,215 4,616 5,140 £1.8m £2.6m £2.7m £3.3m 0 3 6 2022/232020/212018/192016/17 Blue Badges 42. The Blue Badge scheme allows individuals with mobility problems to park for free at on-street parking meters, in ‘pay and display’ bays, in designated Blue Badge spaces, and on single or double yellow lines in certain circumstances. Badges are sometimes used by unauthorised persons after the badge holder has died. Not only is this an offence under the Disabled Persons’ Parking Badges (Scotland) Act 2014, but it may also result in parking spaces being denied to people who legitimately use the Blue Badge scheme. 43. The NFI matches Blue Badges issued to records of deaths, enabling badges to be cancelled. The number of badges cancelled in 2022/23 has gone up to 5,140, as shown at Exhibit 12. Page 261 of 268
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4. Specific match areas 22 44. The increased number of cancellations, together with a new estimate multiplier, has resulted in a higher notional outcome value. The Cabinet Office estimation methodology now applies £650 per badge cancelled (compared to £575 per badge in 2020/21). Housing Tenancy 45. With reported housing shortages and high levels of homelessness, tenancy fraud is increasingly an issue for councils. Where fraudulent subletting exists, it means that properties are not available to house people who are in most need and this can be costly to councils. 46. The NFI uses council housing tenancy data to identify possible cases where tenants may have sublet their property. It also helps identify cases where the tenant has died, and the property is either empty or has other individuals living in it. 47. As a result of the 2022/23 exercise, councils were able to identify and recover ten properties. A housing association property was also identified and made available for social housing. The numbers of properties recovered along with the notional outcome estimates for the last four exercises are shown at Exhibit 13 (page 23). 48. Notional outcomes of £78,300 are allocated per property recovered (£93,000 in 2020/21). This is based on an average four-year fraudulent tenancy and includes estimated costs of temporary accommodation for genuine applicants; legal costs to recover property; re-let cost; and rent foregone during the void period between tenancies. 49. In addition to recovery of properties, NFI has enabled several councils to update tenancy details where there has been legitimate succession following a bereavement. Page 262 of 268
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4. Specific match areas 23 Exhibit 13. Housing Tenancy outcomes and case numbers by NFI exercise Tenancies recovered as a result of NFI have remained in double figures in 2022/23. Source: NFI management information 0.00 0.50 1.00 2022/232020/212018/192016/17 £ million 2 1 10 11 £0.09m £0.19m £0.93m £0.86m Notional outcomes Tenancies recovered0 6 12 2022/232020/212018/192016/17 Housing Waiting Lists 50. Councils maintain waiting lists for council housing, and in some cases for all social housing in their area. The NFI matches waiting list data to housing tenancy data and other data sets, enabling undisclosed changes in circumstances to be picked up. This enables removal of ineligible applicants from the waiting list, stops inappropriate allocations, and accelerates allocations to people in genuine need of social housing. 51. In 2022/23 we have seen an increase in the number of applicants removed from waiting lists as a result of NFI. Notional outcomes have also increased as shown in Exhibit 14 (page 24). Page 263 of 268
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4. Specific match areas 24 52. Notional outcomes are attributed to applicants removed from the waiting list on the basis that social housing could have been allocated inappropriately. The estimation methodology allocates £4,283 per case removed from the waiting list (an increase from £3,240 per application in 2020/21). Exhibit 14. Housing Waiting List outcomes and case numbers by NFI exercise More applicants have been removed from the waiting list in 2022/23 than in previous exercises. Source: NFI management information 0.0 0.8 1.4 2022/232020/212018/192016/17 £ million 90 230 187 280 £0.7m £0.3m £0.6m £1.2m Notional outcomes Applicants removed from waiting list0 150 300 2022/232020/212018/192016/17 Page 264 of 268
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255. Pilot exercises and future developments 5. Pilot exercises and future developments Social Security Scotland took part in a pilot data-matching exercise which identified limited fraud and error. We are also exploring the possibility of involving wider public sector bodies in the 2024/25 NFI exercise on a voluntary basis. Social Security Scotland – benefits pilot 2022 53. In 2022 a pilot exercise was undertaken with Social Security Scotland (SSS) to identify any instances where claimants received support but were not residing in Scotland, or where claimants appear to have claimed benefits more than once (eg, from more than one Scottish address). The pilot exercise included payments made in the three-month period from April to June 2021. 54. Around 45,000 lines of data relating to benefit payments were submitted for matching, resulting in the identification of 367 claimants who appeared to be residing outwith Scotland. Following review and corroboration of addresses by SSS there were just 17 cases where claimants were not entitled to benefits. Overpaid benefits of £16,450 were identified, a further £20,000 could have been paid out in relation to these claims, over the remaining eligibility periods. 55. Despite the identification of fraud and error, the number and value of cases was not deemed sufficient to justify the inclusion of this match type in the main biennial NFI exercise in 2022/23. The intention is to run another pilot in 2024/25 which may also include Adult Disability Payments for the first time. Inclusion of bodies on a voluntary basis 56. There are potential benefits from expanding the NFI to include more public sector bodies in Scotland. We invited Scottish housing associations and universities to participate in the 2024/25 NFI on a voluntary pilot basis. 57. While no universities have volunteered for participation, we are working with several interested housing associations. At this time, it is unclear how many of those interested will actually participate. Page 265 of 268
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26Appendix Appendix Estimated outcomes methodologies In some cases NFI outcomes include an estimated element for forward savings or for where no monetary value can be recovered The NFI uses the term ‘outcomes’ to refer to the financial value of fraud, error and overpayment that can be attributed to NFI data matching. In some cases NFI outcomes include an estimated element which seeks to capture: • The value of loss from a fraud or error detected because of an NFI match, in instances where no monetary value can be recovered - such as the value of recovering a property from a tenant who has fraudulently obtained that tenancy. We have called these ‘notional outcome estimates’ in our report. • The value of any future losses that may have been incurred without intervention as a result of an NFI match. For example, the value of future overpayments prevented through detecting and stopping a fraudulent or erroneous housing benefit claim. We have called these ‘forward savings’ in our report. Most NFI datasets have a methodology to calculate estimated outcomes. These methodologies account for: • data relevant to the fraud problem, including national published data and data from previous NFI cases • the policy context relative to the fraud problem • any regional variances that may result in the generation of estimate methodologies specific to a region or area • alignment where possible with relevant estimated savings methodologies used in other central government departments. All methodologies are reviewed prior to the start of each new NFI exercise. Any changes are reviewed by the Cabinet Office NFI Governance Board and approved by the Cabinet Office Fraud Prevention Panel. This panel consists of cross government counter fraud experts (including representatives from DWP, HMRC, NHS, MOD, BEIS, DFID, NAO, etc.) who review and challenge, where necessary, methodologies for calculating the estimated value of fraud prevention initiatives across government departments. Page 266 of 268
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Appendix 27 Once approved, these methodologies are built into the NFI web application to enable the estimated outcomes element to be automatically generated. A summary of the outcomes methodology calculations applied to NFI datasets is set out in the following table: Data match Basis of calculation of forward savings and estimated outcomes Council tax single person discount Forward savings – Annual value of the discount cancelled multiplied by two years. Council tax reduction scheme Forward savings – Weekly change in council tax discount multiplied by 33 weeks (increased from 21 weeks in 2020/21). Housing benefit Forward savings – Weekly benefit reduction multiplied by 21 weeks. Pensions Forward savings – Annual pension multiplied by the number of years until the pensioner would have reached the age of 85. Housing Tenancy Notional outcomes – £78,300 per property recovered, based on average four–year fraudulent tenancy. Includes: temporary accommodation for genuine applicants; legal costs to recover property; re–let cost; and rent foregone during the void period between tenancies (reduced from £93,000 in 2020/21). Housing waiting lists Notional outcomes – £4,283 for each case based on the annual estimated cost of housing a family in temporary accommodation, the duration a fraud may continue undetected and the likelihood a waiting list applicant would be provided a property (increased from £3,240 in 2020/21). Blue Badges Notional outcomes – Number of badge holders confirmed as having died multiplied by £650 to reflect lost parking and congestion charge revenue (increased from £575 in 2020/21). Concessionary bus travel Forward savings – Number of bus passes used fraudulently multiplied by £420. Based on average fraudulent use and reflecting two years forward use. Payroll Notional outcomes – £5,685 for each employee dismissed or resigns as a result of NFI matching. (up from £5000 in 2020/21). Page 267 of 268
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The National Fraud Initiative in Scotland 2024 Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN Phone: 0131 625 1500 Email: info@audit.scot www.audit.scot ISBN 978 1 915839 46 6 Page 268 of 268