Agenda Document Pack - Audit Committee - 23/02/2026
Midlothian Council · 23 February 2026
Back to Audit Committee — 23 February 2026 and its agenda
Text extracted from the council's PDF. Layout and reading order may differ from the original.
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Notice of Meeting and Agenda Audit Committee Venue: Normandy Court/ Hybrid, Normandy Court, 20 Normandy Dr, Dalkeith, EH22 1JG Date: Monday, 23 February 2026 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 246
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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 the Audit Committee meeting of 2 December 2025 submitted for approval 5 - 16 4.2 Action Log 17 - 20 5 Public Reports 5.1 Midlothian Council Annual Audit Plan 2025/26, report by Audit Director, Audit Scotland 21 - 42 5.2 Local Government in Scotland: Financial Bulletin 2024/25, report by Chief Finance Officer and Section 95 Officer 43 - 88 5.3 Treasury Management and Investment Strategy 2026/27 & Prudential Indicators, report by Chief Finance Officer and Section 95 Officer 89 - 166 5.4 Internal Audit Work to January 2026, report by Chief Internal Auditor 167 - 178 5.5 Internal Audit Strategy and Annual Plan 2026/27, report by Chief Internal Auditor 179 - 196 5.6 Counter Fraud Annual Plan 2026/27, report by Chief Internal Auditor 197 - 202 5.7 Strategic Risk Management – Strategic Risk Profile Quarter 3, 2025-26, report by Chief Officer Place 203 - 246 6 Private Reports No items for discussion Page 2 of 246
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7 Date of Next Meeting The next meeting will be held on Monday 15 June 2026 at 11am. Page 3 of 246
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Audit Committee Monday 23 February 2026 Item No 4.1 Audit Committee Date Time Venue Tuesday 2 December 2025 11:00am MS Teams Present: Councillor McEwan (Chair) Councillor Bowen Councillor McCall Councillor Milligan Councillor Smaill In Attendance: Councillor Alexander Councillor McKenzie Councillor Parry Councillor Pottinger Councillor Scott Dr Grace Vickers, Chief Executive Kevin Anderson, Executive Director Place Morag Barrow, Joint Director Health and Social Care and Chief Officer to Midlothian Integration Joint Board David Gladwin, Chief Financial Officer and Section 95 Officer Saty Kaur, Chief Officer Corporate Solutions Derek Oliver, Executive Director Children Young People and Partnerships (Acting) Duncan Stainbank, Chief Internal Auditor Alan Turpie, Legal and Governance Manager and Monitoring Officer Elaine Greaves, Principal Internal Auditor Gary Thomson, Senior Finance Business Partner Katie Gibson, Audit Scotland Nicola Thorburn, Democratic Services Team Leader Page 5 of 246
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1. Welcome and Apologies for Absence The Chair welcomed everyone to the meeting of the Audit Committee. No apologies were received. 2. Order of Business The Order of Business is as per 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 Minutes of the previous meeting, held on 30 September 2025, were submitted for approval and unanimously approved as a correct record. 4.2 Audit Committee requested an update on both items on the action log and that commentary is added. Action 1 – The Executive Director Place advised that there were no colleagues from Heath & Social Care currently in the meeting and that an update would be circulated by email. Action 2 – The Executive Director Children Young People and Partnerships (Acting) advised that this information has been requested and will be provided ahead of the next meeting of the Audit Committee in February 2026. 5. Public Reports Report No. Report Title Submitted by: 5.1 Treasury Management Mid-Year Review Report Chief Financial Officer and Section 95 Officer Outline of report and summary of discussion The Chief Financial Officer and Section 95 Officer presented the report which informs Members of the Audit Committee, and subsequently Council, of the Treasury Management activity undertaken during the first half of 2025/26 and the forecast activity for the second half of 2025/26 in accordance with the Treasury Management and Annual Investment Strategy approved by Council on 25 February 2025. It also provides an update to the Treasury and Prudential Indicators for 2025/26. The Audit Committee were invited to comment on this report before it is presented to Council. Audit Committee should note the following recommendations which are proposed to be put to Council on 16 December 2025: - Page 6 of 246
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a) Note the report and the treasury activity undertaken in the period to 20 November 2025, as outlined in Section 4 and Section 5.2. 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 5.2 and 5.3; and note the continuation of a Treasury Management strategy of minimising cash (fixed term deposit) balances to allow the Council to continue to defer costs associated with locking into longer-term borrowing at rates that remain elevated, noting that this strategy is similar to the majority of other Scottish Councils; c) Note the technical revisions to the Prudential Indicators in Section 6 of this report. d) Note the loans fund rate performance relative to other Scottish Local authorities, as outlined in Section 7, and the cash saving (compared to the Scottish Average) that the Treasury Management function brings to support the Council’s in-year revenue budget. The Chair thanked for Chief Financial Officer and Section 95 Officer for their report and invited questions. Councillor Parry and the Executive Director Joint Director Health and Social Care and Chief Officer to Midlothian Integration Joint Board (MIJB) joined the meeting at 11:06am. Following the repayment of the Public Works Loan Board (PWLB) loan to the UK Debt Management Office Councillor Smaill asked where the one-off discount of £1.079million is accounted for. The Chief Financial Officer and Section 95 Officer advised that there are several options on what to do with this money and these are being carefully explored before being presented to Council in Quarter 3. Councillor Smaill also asked when the Council are going to reach their borrowing limit and what happens at that point. Councillor Smaill noted that this year, and prior years, the Council has not built its assets as quickly as expected so therefore borrowing is currently below the authorised limit. The Chief Financial Officer and Section 95 Officer advised that the borrowing strategy is being presented on an annual basis, and it is at that point where discussion would be had on the borrowing limits and the flexibility of borrowing to ensure that both Council and Audit Committee are comfortable with the position. The Chief Financial Officer and Section 95 Officer added that it is unlikely that we would reach the borrowing limits as they are always ahead with having the strategy in place. Audit Committee thanked and congratulated the Chief Financial Officer and Section 95 Officer, the Senior Finance Business Partner and their teams for a great report and a job well done. Councillor Smaill highlighted that Hillend is currently doing very well and queried whether this asset should be revalued in terms of fair value principals which may attract lenders to the Council and whether any of the preparatory expenses from Hillend require to be written off. The Chief Financial Officer and Section 95 Officer advised that the value of Hillend, and indeed any asset the Council hold is revalued on an annual basis through the capital accounting. The costs that are chargeable to the capital programme are determined by the Local Authority Account Code of Practice and at this point there are none that need written off against the revenue Page 7 of 246
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account, but this may come in the next stage of the Hillend development. In terms of future borrowing, in a Local Authority context, that is something that can be done if we are creating or improving an asset so that flexibility already exists. Councillor McCall highlighted that it was positive to see an advert for Hillend running on prime-time television which will increase the visitors coming to Midlothian. The Chair added that they take comfort that Hillend is now starting to make a return on the investment. Decision Audit Committee noted the report and its recommendations. Report No. Report Title Submitted by: 5.2 Internal Audit Work to November 2025 Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor presented the report for decision, providing 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 2025/26 was approved by the Audit Committee on 24 February 2025. 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 Global Internal Audit Standards (GIAS) including the production of this report to communicate the results of the reviews. 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 2025/26. 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. Page 8 of 246
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The Chair thanked for Chief Internal Auditor for their report and appreciated that they would not have taken the decision lightly to advise that these are providing limited assurance as this determines that there are significant gaps, weaknesses and non-compliance. The Chair invited questions. Councillor Milligan highlighted a statement within the report that states that the Council do not have an existing Home to School Transport policy. Councillor Milligan added that they find this impossible to believe as they have seen many reports being presented in relation to changing this policy. This is not a new subject; the budget has been overspending by almost £1millon per year for the last few years to the extent where Officers were asked to revisit this year’s budget to increase the Home to School Transport budget by £1million. Councillor Milligan requested an explanation. The Chief Internal Officer advised there is a Home to School Transport policy in place now and that this was approved by Council in May 2025. For the period prior to that, Internal Audit were not provided with a Home to School Transport policy and were unable to establish if there was a policy in place for mainstream school transport. There was a policy in place for Adult Social Care. Councillor Milligan referred to the Senior Officers attending the meeting today for further information and confirmation if there was a policy in place prior to May 2025 and whether this was just not provided to Internal Audit. The Chair agreed and invited Officers to respond. The Executive Director Children Young People and Partnerships (Acting) advised that, in terms of their previous post as the Chief Officer Place for the Travel and Transport Team, there were processes in place to deliver Home to School Transport and that they can review and confirm the position on the Home to School Transport policy and what was reported to Internal Audit. The Executive Director Place advised that there is now a definitive policy in place and what we did not have previously was any set criteria in terms of eligibility. The transport provision was based on referrals that the Travel and Transport Team received, and eligibility was not questioned, which is a failing that has been picked up as part of this audit and processes have been tightened since. In terms of eligibility, this is now filtered through colleagues in Education to be clear of what type of transport is provided – this process was in place this year and has been smoother than previous years however there are some anomalies where all the details are not available. The Chief Executive confirmed Officers will collate the information on policies, procedures and guidelines that were in place prior to the policy being agreed in May 2025 and present to the Client Transport Cross Party Working Group to demonstrate what has been in place. The Chair thanked the Chief Executive and queried if any of this information had already been shared with Internal Audit. Page 9 of 246
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The Chief Internal Auditor advised that this will have been provided to Internal Audit, however Officers will check Internal Audit has all information. Councillor Milligan still felt that there was a lot of missing information and unanswered questions. For example, how would the Travel and Transport Team know if someone was eligible for provision. This should have been the responsibility of Education or Social Work Departments. The Chief Internal Audit added that there are also legislative requirements that the Council has over transporting children which were in place and being adhered to. Councillor Bowen agreed with the sentiments expressed by Councillor Milligan and asked if Home to School Transport had been dealt with by Audit Committee previously. The Chair advised that the investigation by Audit Committee and Internal Audit was generated by the significant overspend in a short period of time. The Chief Internal Audit added that there was a report presented to Audit Committee in 2021 however it was light touch and there were no recommendations. The report in today’s meeting papers is much more detailed and has been through all the controls. Councillor Smaill added that the Conservative Group investigated the Home to School Transport issue in detail around 7 years ago and were advised that it was all procured under the normal rules of the Council and that there was a statutory obligation. Councillor Smaill highlighted some of the billing issues with unscrupulous suppliers and asked if there was any recovery action that could be taken. Additionally, Councillor Smaill asked if there was a certain point where a child does not need a taxi to school. The Chief Financial Officer and Section 95 Officer advised that if the Council has overpaid for a service there is an option to chase this or seek recompense. The Chief Financial Officer and Section 95 Officer added that there have been many lessons learned and that we were in a different place for 2025/26. This year's figures are based on comprehensive information and are posted with a degree of accuracy. Councillor Smaill added that the problem in seeking recompense for overpayment to suppliers is that the information we hold is not complete. Councillor Smaill suggested that, if overpayments had been made, then discussions on future contracts with those suppliers should take this into consideration. The Chief Internal Auditor added that in terms of over payments, recovery has been made from the instance that was reported by a parent, and the supplier is no longer on those routes. Contracts are in place from 2025, and the invoicing now flows from the providers. As part of the control process, these must be received in a timely manner to allow the Chief Financial Officer and Section 95 Officer to include these in the financials. The Chair queried why invoices with no route numbers are being authorised for payment. The Chief Internal Auditor advised that the Education Team created a database to reconcile the incoming invoiced, however this had not been shared with Finance. This information sharing is now in place, and it is the intention of Internal Audit to revisit this in 2026 and provide further reassurance to the Audit Committee. Page 10 of 246
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Councillor Smaill asked why things started to change and go wrong in relation to Home to School Transport when it did. The Chief Internal Audit advised that there were 4 significant reasons for the increases in costs in the 2024/25 financial year; (i) a general inflationary increase, (ii) in August 2024 the time of the school day was changed and all secondary schools in the authority started and finished at the same times which led to an increase in busses required, (iii) in January 2025 the decision was taken to close Mayfield Primary School and transport the children to the alternative school and (iv) there was a significant increase in the Additional Support Needs (ASN) population of pupils being transported. Councillor Milligan added that this report, and what has been discussed, is a damning indictment of the Council’s ability to deliver within budget. The lack of policy, the lack of clarity on authorisation procedures, a budget that has been overspent by £1million for years, no investment in appropriate software solutions for pupil transport, financial information not flowing appropriately and the lack of resources were highlighted by Councillor Milligan as being noted in the report as contributing factors to this issue. Councillor Milligan reminded Audit Committee that Council put an additional £1million in the 2025/26 budget to get a balanced budget for Home to School Transport. The reports now show a further £900,000 overspend despite us being in a different place as per the Chief Financial Officer and Section 95 Officer’s update. Councillor Milligan is unclear on how this can continue to be overspent and asked what Officers are doing to investigate and manage this, particularly now that there is a policy in place. This is a front-line service that is fluid and therefore should have the most in-depth oversight by the Senior Management Team, Audit, Legal and Finance. Councillor Milligan added that the information being provided to the 18 Elected Members does not contain enough detail to allow them to do their job. The Chief Financial Officer and Section 95 Officer advised that for the 2025/26 budget, £1million was added but that was based on the figures that Finance were working with from 2024/25, recognising that costs were well out with budget and to set a reasonable balanced budget they needed to add a significant amount of cost. The Chief Financial Officer and Section 95 Officer explained that this decision was taken in advance of knowing the end position for 2024/25, and as the audit report shows, this was discussed at Council in June 2025 and some of the meetings prior to that. There was a significant unknown cost that came through in the last quarter of 2024/25 that was not included when the budget was set and therefore not considered, this equated to approximately £700,000. If the Finance Team had been aware of the £700,000 when the budget was set, they would have added £1.7million rather than £1million. The figures being projected for the current financial year are £200,000 more than that therefore for 2025/26 they have only seen a cost increase of that amount based on the actuals from 2024/25. Councillor Milligan acknowledged why the £1million was added and that it had been a continuation from previous years and therefore it was prudent to add that. Elected Members had explained that the additional £700,000 was a result of not having a good management system, insufficient oversight and no policy in place. Councillor Milligan highlighted that, at a meeting of the Business Transformation Steering Group (BTSG), Elected Members asked that the budget be realigned due to the continued overspend as they assumed Officers had done all they could to check the spend could be brought back into line. Councillor Milligan stated they were Page 11 of 246
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unclear on why there is continued overspend when there is now a policy in place and asked at what stage it is recognised that this budget is out of control. The Joint Director Health and Social Care and Chief Officer to Midlothian Integration Joint Board left the meeting at 11:51am. The Chief Internal Auditor advised that, in terms of going forward with Home to School Transport, this audit takes us to a point where there is a base level of a control environment which means Officers will have the information in the correct format to make defined policy choices and will also support Elected Members making informed decisions. The authorisation process is in place regarding ASN however a review may be required regarding eligibility. The Chair asked that Internal Audit are fully engaged with Home to School Transport going forward and asked that a report is brought to Audit Committee annually. The Chief Internal Auditor also agreed to attend the Cross Party Working Group. Councillor Milligan reiterated that this is a front-line demand-led service which requires the highest level of oversight to monitor mistakes or any potentially fraudulent activity. The Chief Executive added that, as the Chief Internal Auditor advised, the policy had been implemented in line with statutory requirements but highlighted that the Scottish Government have school transport guidance and suggested that a mapping exercise is undertaken to ensure policy, guidance and governance are aligned and include an analysis of the demographic. It was agreed that this deeper dive should be captured at the Client Transport Cross Party Working Group and a quarterly update on the spend be reported to Audit Committee. The Chair agreed and highlighted that they do not want to see services withdrawn but we must ensure the service is being delivered to the correct people. Councillor Smaill agreed and suggested that eligibility should be reviewed annually as not all ASN people will require transport. Councillor Milligan stressed that this budget must be brought back inline to avoid cuts to other critical services. Councillor Milligan asked if transport operators are registered to take payments under the new contracts and whether young people, who are entitled to free bus travel, could use their bus passes. Councillor McCall added that offering parents mileage and having buses for outlying areas to maximise use could be considered as ways to reduce costs. Councillor McCall appreciated that it is not easy for some young people with ASN to share transport, but it is something that could be looked at. The Chief Internal Audit Officer assured Audit Committee that a lot of the ideas shared during today’s meeting are being explored by the project board and that having the control measures in place allows informed decisions to be made. The Chair noted that today’s discussion had briefly covered the Foster Care and Adoption report. The Chief Internal Auditor advised that the service is currently following up on all the recommendations to bring it under control. Page 12 of 246
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The report was moved by Councillor McCall, seconded by Councillor Smaill. Decision Audit Committee approved the report and the recommendations. Action Collate the information on policies, procedures and guidelines that were in place prior to the Home to School policy being agreed in May 2025 and present to the Client Transport Cross Party Working Group to demonstrate what has been in place – Chief Executive and Executive Director Children Young People and Partnerships (Acting). Extend an invitation to the Client Transport Cross Party Working Group to the Chief Internal Auditor – Democratic Services. Request that the Client Transport Cross Party Working Group undertake a mapping process to ensure policies, procedures and guidance are aligned to those of the Scottish Government – Client Transport Cross Party Working Group. Provide a quarterly update on the budget spend on Home to School Transport - Chief Financial Officer and Section 95 Officer. Report No. Report Title Submitted by: 5.3 Follow-Up Review of Completed Internal Audit Recommendations and Progress Update Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor presented the report for decision, providing 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 August 2024 to September 2025. 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 Page 13 of 246
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governance, risk management and control 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. 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 since the last review 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. The Chair thanked the Chief Internal Auditor for their report and invited questions. Councillor Smaill noted that Internal appear to be much busier than in previous years and asked if there was sufficient resource in the team. The Chair asked the Chief Internal Auditor to ensure Audit Committee are made aware of any resource or system requirements. Councillor Smaill referred to the tables on page 73 and 74 of the meeting papers and specifically the section on Developer Contributions and Midlothian Energy Limited (MEL). The information in the table considers Developer Contributions to be of high financial value but the rating given is low and for MEL there is a higher level of scrutiny required. Councillor Smaill asked if these should be rated as high to match the narrative. The Chief Internal Auditor acknowledged Councillor Smaill’s points and advised that for MEL, reporting on this venture does come through Audit Committee and Council in terms of further recommendations. For Developer Contributions, discussions are ongoing to determine whether this can be covered at the Capital Plan & Asset Management Board (CPAMB). The report was moved by Councillor McCall, seconded by Councillor Smaill. Page 14 of 246
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Decision Audit Committee approved the report and its recommendations. Report No. Report Title Submitted by: 5.4 Strategic Risk Management – Strategic Risk Profile Quarter 2, 2025-26 Executive Director Children Young People and Partnerships (Acting) Outline of report and summary of discussion The Executive Director Children Young People and Partnerships (Acting) presented the report for information, providing Audit Committee with: • An update on the risk responses Midlothian Council has implemented during Q2 2025/26 to respond to the current risk climate. • Assurance that Midlothian Council took a proportionate and planned approach to prepare and respond to the current risk climate. • The risk evaluation of current strategic risks and opportunities for the Council. Audit Committee is recommended to: • Note the current risk landscape and organisational response to the most significant risks in Quarter 2, 2025-26 (1st July to 30th September 2025). The Chair thanked the Executive Director Children Young People and Partnerships (Acting) for their report and invited questions. Audit Committee noted the strategic risks shown on page 95 of the meeting papers and queried the climate change evaluation. The Executive Director Children Young People and Partnerships (Acting) added that the scoring is complex in term of likelihood and impact. Those two parameters themselves are at the highest degree. Midlothian Council is on course to meet its net-zero target and changing that target from 2030 to 2045 provides more time and aligns us with the government targets. Councillor Smaill highlighted fire risk and suggested that remote sites, such as Vogrie and Hillend, are added as specific fire risk areas as they are not attended sites at night. The Executive Director Children Young People and Partnerships (Acting) advised that, in terms of fire risk assessments and discussion with the Scottish Fire and Rescue Service in relation to remote sites, they are aware of fire detection and fire deterrents. The Executive Director Children Young People and Partnerships (Acting) acknowledged Councillor Smaill’s point and added that those sites will be identified in service risk registers however they will consider this for the Q3 report. The Chair highlighted section 3.24 of the report (page 98) and the reference to Hopefield Industrial Estate. The Chair asked if this was a marketing exercise to Page 15 of 246
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determine if the site was still in demand as they understood that this may have been used for small units and startup businesses. The Executive Director Children Young People and Partnerships (Acting) advised that consideration has been given to this at various governance forums and that work is ongoing so an updated report will follow. The Chair asked if this site will be Council owned and run. The Executive Director Children Young People and Partnerships (Acting) advised that the site will be owned by the Council, and a paper will be presented with options on how this could be run. Councillor Bowen mentioned the Scottish Child Abuse Enquiry, which requires local authorities to make records from 1930 available, and asked if Midlothian Council had received any requests. The Executive Director Children Young People and Partnerships (Acting) advised that, in terms of any claims that come in, the team are having to look back through the detail. The recovery is an arduous task, but the team will pick this up as and when claims come forward. Councillor Bowen asked for detail on the frequency and number of requests being received. It was agreed that the Executive Director Children Young People and Partnerships (Acting) would pick this up with Councillor Bowen offline. Councillor Smaill asked if there were long term projections for social housing in Midlothian as there are concerns that reserves may be exhausted due to the reduction in government funding and the developer contributions not being enough. The Executive Director Place advised that the suite of housing papers including the Strategic Housing Investment Plans (SHIP) were presented to Council in October 2025 and that included projections to 2035. The Executive Director Place acknowledged that there was a disruption to the housing programme due to the reduction in subsidy in prior years and this was reported through Council. There has been a full reinstatement following the Scottish Government’s response to the housing emergency; however Midlothian Council are unable to reinstate every project that was in the SHIP at that time although elements that were still available were reinstated. In terms of the financial modelling, this will be part of the Rent Setting Briefing which will be delivered to Elected Members in January or February 2026. The public consultation is currently underway. Decision Audit Committee noted the report and the recommendations. 6. Private Reports No items for discussion. 7. Date of Next Meeting The meeting concluded at 12:35pm. The next meeting of the Audit Committee will be held on Monday 23 February 2026 at 11:00am. Page 16 of 246
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Audit Committee Monday 23 February 2026 Item 4.2 Audit Committee Action Log No Date of Meeting Item No and Title Action Action Owner Expected completion date Comments 1 30 September 2025 5.7 Strategic Risk Management – Strategic Risk Profile Quarter 1, 2025-26 Review the Strategic Risk Ratings assigned to Care at Home and provide an update. Joint Director Health and Social Care and Chief Officer to Midlothian Integration Joint Board Complete Recommended for Closure Risk cause Internal and External providers of Care at Home services unable to meet service and quality requirements as a result of a lack of capacity. Risk event Capacity of Community Support outstripped by demand. 1. Care at Home business continuity plan complete 2. External commissioning complete and ongoing contract monitoring in place 3. Weekly provider meetings in place 4. Dynamic management of waiting lists in effort to reduce community waits The likelihood remains at 3 and the impact 4. Page 17 of 246
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No Date of Meeting Item No and Title Action Action Owner Expected completion date Comments 2 30 September 2025 5.7 Strategic Risk Management – Strategic Risk Profile Quarter 1, 2025-26 Review SRP.RR.22 Cost of Living Crisis and update with current data following changes in the support and benefits available since 2022. Executive Director Children Young People and Partnerships (Acting) February 2026 This information has been requested and will be provided ahead of the next meeting of the Audit Committee in February 2026. 3 2 December 2025 Internal Audit Work to November 2025 – Home to School Transport Collate the information on policies, procedures and guidelines that were in place prior to the policy being agreed in May 2025 and present to the Client Transport Cross Party Working Group to demonstrate what has been in place. Chief Executive and Executive Director Children Young People and Partnerships (Acting) TBC 4 2 December 2025 Internal Audit Work to November 2025 – Home to School Transport Extend an invitation to the Client Transport Cross Party Working Group to the Chief Internal Auditor Democratic Services December 2025 Recommended for Closure. Complete – distribution list and existing meeting invites updated to include the Chief Internal Auditor. 5 2 December 2025 Internal Audit Work to November 2025 – Home to School Transport Request that the Client Transport Cross Party Working Group undertake a mapping process to ensure policies, procedures and guidance are aligned to those of the Scottish Government. Client Transport Cross Party Working Group June 2026 Page 18 of 246
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No Date of Meeting Item No and Title Action Action Owner Expected completion date Comments 6 2 December 2025 Internal Audit Work to November 2025 – Home to School Transport Provide a quarterly update on the budget spend on Home to School Transport. Chief Financial Officer and Section 95 Officer February 2026 Page 19 of 246
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Midlothian Council Annual Audit Plan 2025/26 Prepared for Midlothian Council February 2026 Midlothian Council Monday 23 February 2026 Item No 5.1 Page 21 of 246
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Midlothian Council Annual Audit Plan | 2 Contents Introduction 3 Audit scope and responsibilities 4 Audit of the annual accounts 6 Wider scope audit 12 Best Value audit 14 Reporting arrangements, timetable and audit fee 16 Other matters 19 Accessibility You can find out more and read this report using assistive technology on our website www.audit.scot/accessibility. Page 22 of 246
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Introduction | 3 Introduction Purpose of the Annual Audit Plan 1. The purpose of this Annual Audit Plan is to provide an overview of the planned scope and timing of the 2025/26 audit of the Midlothian Council annual accounts. It outlines the audit work planned to meet the audit requirements set out in auditing standards and the Code of Audit Practice, including supplementary guidance. Appointed auditor and independence 2. Claire Gardiner of Audit Scotland has been appointed by the Accounts Commission as external auditor of Midlothian Council (the council) for the period from 2022/23 until 2026/27. The 2025/26 financial year is therefore the fourth of the five-year audit appointment. 3. The appointed auditor and the audit team are independent of the council in accordance with relevant ethical requirements, including the Financial Reporting Council’s Ethical Standard. This standard imposes stringent rules to ensure the independence and objectivity of auditors. Audit Scotland has robust arrangements in place to ensure compliance with ethical standards. The arrangements are overseen by the Executive Director of Innovation and Quality, who serves as Audit Scotland’s Ethics Partner. 4. The Ethical Standard requires auditors to communicate any relationships that may affect the independence and objectivity of the audit team. There are no such relationships pertaining to the audit of the council to communicate. Page 23 of 246
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Audit scope and responsibilities | 4 Audit scope and responsibilities Scope of the audit 5. The audit is performed in accordance with the Code of Audit Practice, including supplementary guidance, International Standards on Auditing (UK), and relevant legislation. These set out the requirements for the scope of the audit which includes: • An audit of the financial statements and an opinion on whether they give a true and fair view and are free from material misstatement. • An opinion on statutory other information published with the financial statements in the annual accounts, namely the Management Commentary and the Annual Governance Statement. • An opinion on the audited part of the Remuneration Report. • Conclusions on the council's arrangements in relation to the wider scope areas: Financial Management, Financial Sustainability, Vision, Leadership, and Governance, and Use of Resources to Improve Outcomes. • Reporting on the council’s arrangements for securing Best Value. • Providing assurance on the Housing Benefit Subsidy Claim, Non- Domestic Rates Return, and the Whole of Government Accounts return. • A review of the council’s arrangements for preparing and publishing statutory performance information. • Provision of an Annual Audit Report setting out significant matters identified from the audit of the annual accounts and the wider scope areas specified in the Code of Audit Practice. Responsibilities 6. The Code of Audit Practice sets out the respective responsibilities of the council and the auditor. A summary of the key responsibilities is outlined below. Auditor’s responsibilities 7. The responsibilities of auditors in the public sector are established in the Local Government (Scotland) Act 1973. These include providing an independent opinion on the financial statements and other information Page 24 of 246
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Audit scope and responsibilities | 5 reported within the annual accounts, and concluding on the council’s arrangements in place for the wider scope areas and to secure Best Value. Midlothian council’s responsibilities 8. The council has primary responsibility for ensuring proper financial stewardship of public funds, compliance with relevant legislation and establishing effective arrangements for governance, propriety and regularity that enables it to successfully deliver its objectives. The features of proper financial stewardship include: • Establishing arrangements to ensure the proper conduct of its affairs. • Preparation of annual accounts, comprising financial statements that give a true and fair view and other information. • Establishing arrangements for the prevention and detection of fraud, error and irregularities, and bribery and corruption. • Implementing arrangements to ensure its financial position is soundly based. • Making arrangements to secure Best Value. • Establishing an internal audit function. Page 25 of 246
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Audit of the annual accounts | 6 Audit of the annual accounts Introduction 9. The audit of the annual accounts is driven by materiality and the risks of material misstatement in the financial statements, with greater attention being given to the significant risks of material misstatement. This chapter outlines materiality, the significant risks of material misstatement that have been identified, and the impact these have on the planned audit procedures. Materiality 10. The concept of materiality is applied by auditors in planning and performing an audit, and in evaluating the effect of any uncorrected misstatements on the financial statements or other information reported in the annual accounts. 11. Materiality is used to determine whether matters identified during the audit could reasonably be expected to influence the decisions of users of the financial statements. Auditors set a monetary threshold when determining materiality, although some issues may be considered material by their nature. Therefore, materiality is ultimately a matter of the auditor’s professional judgement. 12. The materiality levels determined for the audit of the council and its group are outlined in Exhibit 1. Exhibit 1 2025/26 Materiality levels for the council and its group Materiality Midlothian council and its group Materiality – based on an assessment of the needs of users of the financial statements and the nature of the council operations, the benchmark used to determine materiality is gross expenditure based on the audited 2024/25 financial statements. Materiality has been set at 2% of the benchmark. £11.9 million Page 26 of 246
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Audit of the annual accounts | 7 Materiality Midlothian council and its group Performance materiality – this acts as a trigger point. If the aggregate of misstatements identified during the audit exceeds performance materiality, this could indicate that further audit procedures are required. Using professional judgement, performance materiality has been set at 70% of planning materiality. £8.3 million Reporting threshold – all misstatements greater than the reporting threshold will be reported. £0.595 million Source: Audit Scotland Significant risks of material misstatement to the financial statements 13. The risk assessment process draws on the audit team’s cumulative knowledge of the council, including: • the nature of its operations and its significant transaction streams • the system of internal control • governance arrangements and processes; and • developments that could impact on its financial reporting. 14. Based on the risk assessment process, significant risks of material misstatement to the financial statements have been identified and these are summarised in Exhibit 2. These are the risks which have the greatest impact on the planned audit approach, and the planned audit procedures in response to the risks are also outlined in Exhibit 2. 15. The risk assessment process is an iterative and dynamic process. The assessment of risks set out in this Annual Audit Plan may change as more information and evidence is obtained over the course of the audit. Where such changes occur, these will be reported to the council and those charged with governance, where relevant. Page 27 of 246
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Audit of the annual accounts | 8 Exhibit 2 Significant risks of material misstatement to the financial statements Risk of material misstatement Planned audit response Fraud caused by management override of controls Management is in a unique position to perpetrate fraud because of management’s ability to override controls that otherwise appear to be operating effectively. The audit team will: • Evaluate the design and implementation of controls over journal entry processing. • Make inquiries of individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries. • Test journal entries, focusing on those that are assessed as higher risk, such as those affecting revenue and expenditure recognition around the year-end. • Evaluate significant transactions outside the normal course of business. • Carry out substantive testing of income and expenditure transactions around the year-end to confirm they are accounted for in the correct financial year. • Conduct focussed testing of accounting accruals and prepayments. • Assess the adequacy of controls in place for identifying and disclosing related party relationships and transactions in the financial statements. • Assess changes to the methods and underlying assumptions used to prepare accounting estimates and assess these for evidence of management bias. Page 28 of 246
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Audit of the annual accounts | 9 Risk of material misstatement Planned audit response Valuation of property, plant and equipment The council held £1.2 billion of property, plant, and equipment (PPE) at 31 March 2025, of which £1.1 billion was land and building assets. The council is required to value land and building assets at existing use value where an active market exists for these assets. Where there is no active market, these assets are valued on a depreciated cost replacement (DRC) basis. As a result, there is a significant degree of subjectivity in these valuations which are based on specialist assumptions, and changes in the assumptions can result in material changes to valuations. From 2025/26, CIPFA/LASAAC’s revised Code introduces HM Treasury’s reforms, moving local authorities to quinquennial valuations with annual indexation applied in intervening years. The first year of implementation brings an increased risk of material misstatement due to the change in accounting treatment and the new judgements required, particularly when selecting appropriate indices to apply. The audit team will: • Evaluate the design and implementation of controls over the valuation process. • Review the information provided to the valuer and assess this for completeness and accuracy. • Evaluate the competence, capabilities, and objectivity of the valuer. • Obtain an understanding of management’s involvement in the valuation process to assess if appropriate oversight has occurred. • Review the appropriateness of the key data and assumptions used in the 2025/26 valuation process, and challenge these where required. • Review the indices applied by management to assets not subject to valuation in 2025/26 and assess if these are reasonable and have been correctly applied. Source: Audit Scotland Key audit matters 16. The Code of Audit Practice requires public sector auditors to communicate key audit matters. Key audit matters are those matters, that in the auditor’s professional judgement, are of most significance to the audit of the financial statements and require most attention when performing the audit. 17. In determining key audit matters, auditors consider: • Areas of higher or significant risk of material misstatement. • Areas where significant judgement is required, including accounting estimates that are subject to a high degree of estimation uncertainty. Page 29 of 246
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Audit of the annual accounts | 10 • Significant events or transactions that occurred during the year. 18. In addition to the significant risks of material misstatement in Exhibit 2, the following key audit matters have been identified as part of our planning process and will be reported on in our Annual Audit Report. • Pension Valuation: The valuation requires the use of an actuarial methodology based on a range of assumptions including financial and demographic assumptions. Small movements in the assumptions can result in material changes to valuations. We will assess the scope, independence and competence of the professionals engaged in providing estimates for pensions and review appropriateness of actuarial assumptions and results including comparison with other councils. We will establish officer’s arrangements for ensuring the reasonableness of professional estimations and the accuracy of information provided to the actuary by Midlothian Council. Group audit 19. The council is part of a group and prepares group financial statements. The group is made up of five components, including the council which is the parent of the group. Risk assessment procedures have been performed on the group audit to identify if there are any risks of material misstatement to the group financial statements, or any components where audit procedures are required for the purposes of the group audit. The outcome of the risk assessment procedures on the group audit are outlined in Exhibit 3. Exhibit 3 Outcome of risk assessment procedures on the group audit Group component Accounting treatment Risk of material misstatement Audit procedures required Auditor Midlothian Council (Parent) Consolidated on a line-by-line basis Yes – Exhibit 2 Yes – full scope audit Audit Scotland Trusts, bequests, common good community funds (Subsidiary) Consolidated on a line-by-line basis No – not material to the group financial statements Group level analytical procedures only Audit Scotland Page 30 of 246
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Audit of the annual accounts | 11 Group component Accounting treatment Risk of material misstatement Audit procedures required Auditor Lothian Valuation Joint Board (Associate) Accounted for on equity basis No – not material to the group financial statements Group level analytical procedures only Audit Scotland Midlothian Integration Joint Board (Joint Venture) Accounted for on equity basis No – not material to the group financial statements Group level analytical procedures only Audit Scotland Midlothian Energy Ltd (Joint Venture) Accounted for on equity basis No – not material to the group financial statements Group level analytical procedures only PWC Source: Audit Scotland Page 31 of 246
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Wider scope audit | 12 Wider scope audit Introduction 20. Reflecting the fact that public money is involved, the Code of Audit Practice requires that public audit is planned and undertaken from a wider perspective than in the private sector. The wider scope audit set out by the Code of Audit Practice broadens the audit of the annual accounts to include consideration of additional aspects or risks in four wider scope areas, which are summarised below: • Financial Management – this means having sound budgetary processes. Factors that can impact on the council being able to secure sound financial management include the strength of the financial management culture, accountability, and arrangements to prevent and detect fraud, error and other irregularities, bribery and corruption. • Financial Sustainability – this means looking forward over the medium and longer term in planning the services to be delivered and how they will be delivered effectively. This is assessed by considering the council’s medium to longer-term planning for service delivery. This area remains a significant business risk across the local government sector for all councils including Midlothian, especially in the longer term. This area is being actively managed by the council with appropriate financial plans in place which are subject to regular review. We will continue to review and assess the arrangements in place at the council to ensure operations are financially sustainable. • Vision, Leadership and Governance – this means having a clear vision and strategy, with set priorities within the vision and strategy. This is assessed by considering the clarity of plans in place to deliver the vision and strategy and the effectiveness of the governance arrangements to support delivery. • Use of Resources to Improve Outcomes – this means using resources to meet stated outcomes and improvement objectives through effective planning and working with partners and communities. This is assessed by considering the council’s arrangements for ensuring resources are deployed to improve strategic outcomes, meet the needs of service users, and deliver continuous improvement. Page 32 of 246
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Wider scope audit | 13 21. A conclusion on the effectiveness and appropriateness of arrangements the council has in place for each of the wider scope areas will be reported in the Annual Audit Report. Significant wider scope risks 22. No significant risks in the wider scope areas were identified from the risk assessment process. Local Area Network 23. Each council has a local area network (LAN) comprising of representatives from relevant scrutiny bodies. The LAN is responsible for sharing information and intelligence between scrutiny bodies. As part of the risk assessment process, the audit team have met with the LAN to share insights and intelligence on strengths and weaknesses facing the council. No additional significant risks were identified from discussions. Page 33 of 246
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Best Value audit | 14 Best Value audit Introduction 24. Under the Code of Audit Practice, the audit of Best Value in councils is fully integrated within the annual audit. As part of the annual audit, auditors are required to take a risk-based approach to assessing and reporting on whether the council has made proper arrangements for securing Best Value, including follow up of findings previously reported in relation to Best Value. Best Value thematic review 4: Asset Management 25. The Accounts Commission also reports nationally on thematic aspects of councils’ approaches to, and performance in, meeting their Best Value duties. As part of the annual audit, thematic reviews, as directed by the Accounts Commission, are conducted on the council. 26. The thematic review for 2025/26 is on the subject of asset management and involves considering how the council is managing its assets to ensure high quality services whilst also responding to the challenges around financial sustainability and climate change. Conclusions and judgements on the thematic review will be reported in a separate Management Report and summarised in the Annual Audit Report, where required. 27. At least once over the five-year appointment, the Controller of Audit will report to the Accounts Commission on the council’s performance in meeting its Best Value duties. Midlothian Council is included in the fourth year of the programme. Statutory Performance Information 28. Auditors have a statutory duty to satisfy themselves that councils have made proper arrangements for preparing and publishing statutory performance information in accordance with the Statutory Performance Information Direction 2024 (the Direction) issued by the Accounts Commission. The outcome of this will be reported in the Annual Audit Report, which will include: • A conclusion on the council’s arrangements for preparing and publishing the statutory performance information. • Any instances where the arrangements or reporting are not in accordance with the Direction. • Areas where the arrangements require to be improved. Page 34 of 246
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Best Value audit | 15 29. In addition, the Accounts Commission requires auditors to include a summary of Local Government Benchmarking Framework (LGBF) indicators that the council has reported in the Annual Audit Report. Significant Best Value risks 30. No significant Best Value risks were identified from the risk assessment process. Audit work on the wider scope areas will help support conclusions around Best Value. Page 35 of 246
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Reporting arrangements, timetable and audit fee | 16 Reporting arrangements, timetable and audit fee Audit outputs 31. The outputs from the 2025/26 audit include: • This Annual Audit Plan. • An Independent Auditor’s Report to the council and the Accounts Commission setting out opinions on the annual accounts. • A Best Value Thematic Report (BV4) Asset Management and how well the council is managing its assets to achieve corporate priorities, the changing needs of its population and net zero targets. • An Annual Audit Report to the council and the Accounts Commission setting out significant matters identified from the audit of the annual accounts, conclusions from the wider scope and Best Value audit, recommendations, where required, and any good practice identified. 32. The matters to be reported will be discussed with the relevant senior officers of the council for factual accuracy before they are issued. All outputs from the audit will be published on Audit Scotland’s website, apart from the Independent Auditor’s Report, which is included in the audited annual accounts. 33. Target dates for the audit outputs are set by the Accounts Commission. In setting the target dates for the audit outputs, consideration is given to the statutory date for approving the annual accounts, which is 30 September 2026 for local government bodies. 34. The Independent Auditor’s Report and Annual Audit Report are planned to be issued by the target date of 30 September 2026. Audit timetable 35. Achieving the timetable for production of the annual accounts, supported by complete and accurate working papers, is critical to delivery of the audit to agreed target dates. Exhibit 4 includes a timetable for the audit, which has been agreed with management. Agreed target dates will be kept under review as the audit progresses, and any changes required, Page 36 of 246
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Reporting arrangements, timetable and audit fee | 17 and their potential impact, will be discussed with the council and reported to those charged with governance, where required. Exhibit 4 2025/26 audit timetable Audit activity Midlothian council target date Audit team target date Audit committee date Issue of Annual Audit Plan N/A 31 March 2026 23 February 2026 Annual Accounts: • Consideration of unaudited annual accounts by those charged with governance 30 June 2026 N/A 15 June 2026 • Submission of unaudited annual accounts and all working papers to audit team 1 July 2026 N/A N/A • Latest date for audit clearance meeting 31 August 2026 31 August 2026 N/A • Issue of draft Letter of Representation, proposed Independent Auditor’s Report, and proposed Annual Audit Report N/A 16 September 2026 Date TBC • Agreement of audited and unsigned annual accounts 30 September 2026 30 September 2026 Date TBC • Approval by those charged with governance and signing of audited annual accounts 30 September 2026 30 September 2026 15 September 2026 • Signing of Independent Auditor’s Report and issue of Annual Audit Report 30 September 2026 30 September 2026 Date TBC Issue of Best Value Management Report 1 June 2026 1 June 2026 15 June 2026 Certification of Non-Domestic Rates Return 31 December 2026 31 December 2026 N/A Certification of Housing Benefit Subsidy Claim 31 December 2026 31 December 2026 N/A Page 37 of 246
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Reporting arrangements, timetable and audit fee | 18 Audit activity Midlothian council target date Audit team target date Audit committee date Certification of Whole of Government Accounts 31 December 2026 31 December 2026 N/A Source: Audit Scotland Audit fee 36. The council’s audit fee is determined in line with Audit Scotland’s fee setting arrangements. The proposed audit fee for the 2025/26 audit is £308,310 (2024/25: £295,490). 37. In setting the audit fee, it is assumed that the council has effective governance arrangements in place and the complete annual accounts will be provided for audit in line with the agreed timetable. The audit fee assumes there will be no significant changes to the planned scope of the audit. Where the audit cannot proceed as planned, for example, due to incomplete or inadequate working papers, the audit fee may need to be increased. Page 38 of 246
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Other matters | 19 Other matters Internal audit 38. The council is responsible for establishing an internal audit function as part of an effective system of internal control. As part of the audit, the audit team will obtain an understanding of internal audit, including its nature, responsibilities, and activities. 39. While internal audit and external audit have differing roles and responsibilities, external auditors may seek to rely on the work of internal audit where it is considered appropriate. A review of internal audit’s 2025/26 audit plan was carried out to identify if there were any areas where the audit team could rely on its work. The audit team concluded it will not rely on internal audit’s work. However, the audit team will review internal audit's reports and assess if there is any impact on the audit. Audit quality 40. Audit Scotland is committed to the consistent delivery of high-quality audit. Audit quality requires ongoing attention and improvement to keep pace with external and internal changes. Details of the arrangements in place for the delivery of high-quality audits is available from the Audit Scotland website. 41. The International Standards on Quality Management (ISQM) applicable to Audit Scotland for 2025/26 audits are: • ISQM (UK) 1, which deals with an audit organisation’s responsibilities to design, implement, and operate a system of quality management (SoQM) for audits. Audit Scotland’s SoQM consists of a variety of components, such as governance arrangements and culture to support audit quality, compliance with ethical requirements, ensuring Audit Scotland is dedicated to high- quality audit through engagement performance and resourcing arrangements, and ensuring there are robust quality monitoring arrangements in place. Audit Scotland carries out an annual evaluation of its SoQM and has concluded it complies with this standard. • ISQM (UK) 2, which sets out arrangements for conducting engagement quality reviews, which are performed by senior management not involved in an audit, to review significant judgements and conclusions reached by the audit team, and the appropriateness of proposed audit opinions on high-risk audits. Page 39 of 246
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Other matters | 20 42. To monitor quality at an individual audit level, Audit Scotland carries out internal quality reviews on a sample of audits. Additionally, the Institute of Chartered Accountants of England and Wales (ICAEW) carries out independent quality reviews on a sample of audits. 43. Actions to address deficiencies identified by internal and external quality reviews are included in a rolling Quality Improvement Action Plan, which is used to support continuous improvement. Progress with implementing planned actions is monitors on a regular basis by Audit Scotland’s Quality and Ethics Committee. 44. Audit Scotland may periodically seek the views of the council on the quality of audit services provided. The audit team would also welcome feedback at any time. Page 40 of 246
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Midlothian Council Annual Audit Plan 2025/26 Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN Phone: 0131 625 1500 www.audit.scot AS.5.0 Page 41 of 246
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Audit Committee Monday 23 February 2026 Item No 5.2 Local Government in Scotland - Financial Bulletin 2024/25 Report by David Gladwin, Chief Finance Officer and Section 95 Officer Report for Information 1 Recommendations Audit Committee is recommended to: • Consider the Audit Scotland report; and • Note that the key messages have been considered by Council Officers and are either embedded in the Medium Term Financial Strategy (MTFS) Report to be considered by Council on Tuesday 24th February or in plans for future iterations of the MTFS. 2 Purpose of Report / Executive Summary The purpose of this report is to provide Audit Committee with a summary of the Local Government in Scotland Financial Bulletin 2024/25 report which was published by Audit Scotland in January 2026 and is appended to this report. Four main messages come from the report covering revenue funding, budget gaps, use of reserves in addressing budget gaps, delivery of savings capital investment and financial sustainability. Date Friday 6th February 2026 Report Contact: David Gladwin, Chief Financial Officer and Section 95 Officer David.Gladwin@midlothian.gov.uk Page 43 of 246
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3 Background 3.1 Audit Scotland is a statutory body established in 2000, under the Public Finance and Accountability (Scotland) Act 2000. It provides services to the Auditor General for Scotland and the Accounts Commission for Scotland. 3.2 Audit Scotland has prepared the appended report “Local Government in Scotland Financial Bulletin 2024/25” for the Auditor General for Scotland. The Auditor General appoints auditors to Scotland’s central government and NHS bodies; examines how public bodies spend money; helps them to manage their finances to the highest standards; and checks whether they achieve value for money. 3.3 The report sets out the challenges and risks that are impacting on the finances of local Councils with recommendations on how these should be managed and reported. Key Messages 3.4 Some of the key messages contained in the report are: • In 2024/25 councils’ total revenue and income increased in real terms but despite this councils remained reliant on identifying savings, which becomes progressively more difficult year-on-year, and again used reserves to balance their budgets. • Despite being largely successful in implementing the actions agreed to manage budgets, with around 90% of savings targets delivered, the sector reported a collective overspend against their agreed revenue budgets for the first time in six years. • Most councils spent less than planned on capital projects and were relying more on borrowing to finance expenditure in the face of reductions in capital funding. Councils continue to borrow more to enable investment in their estates and council debt, and annual interest costs, continue to increase. • There are increasing indications that councils are struggling financially. Costs continue to outpace funding increases, and there remain significant commitments on funding to fulfil both statutory duties and national policy commitments. • Councils need to take urgent action to address the sustained and recurring cost pressures associated with delivering services. This will mean carefully considering where services need to be reduced; how service delivery can be fundamentally reconfigured; who is eligible to receive services; and policies on fees and charges. 3.5 Recommendations are contained on page 6 of the report and listed below in table 1 with an initial self-evaluation on the Council’s position against them. Page 44 of 246
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Table 1: Report Recommendations and Initial Self-Assessment Recommendation Self-evaluation Councils must continue to improve the clarity and comprehensiveness of their reporting on savings performance within their management commentaries, including the provision of comparisons to targets agreed during budget-setting and whether savings made were recurring or non-recurring. Management commentary contains information on savings but narrative will be reviewed with the aim of sharpening it up thus improving visibility to the reader. Councils should clearly explain within their management commentaries, and within reports to elected members, how future revenue budgets will be impacted by investment decisions and capital underspends. Capital investment or monitoring reports contain details of revenue consequences in MTFS projections. Work will continue to ensure they are clear to decision makers. Ensure that their longer-term capital investment plan, and the impact that capital underspending, programme slippage and changes to overall indebtedness arising from accounting changes have had on their overall financial position, is reported clearly and in a timely manner to elected members This is embedded in routine regular reporting to elected members both at Council and at Audit Committee. Longer- term capital plans will continue to be developed, refined and improved. Ensure that reserves policies are current and remain fit for purpose, and that where agreed minimum reserves levels are breached, or forecast to be breached, there is a clear and time- bound plan for recovery. Reserves policies have been approved by Council and are applied and managed as part of ongoing financial reporting. Financial reports refer to reserves positions, and these are also covered in the management commentary. Continue to work with their appointed auditors to ensure they produce annual financial statements in a timely manner, as the sector continues its recovery to meet statutory reporting deadlines. The 2024/25 accounts were completed and audited within statutory deadlines and plans for the 2025/26 accounts aim to continue this. Ensure that long-term financial plans (over five years), that adequately consider risks to financial sustainability and include detailed scenario planning, are in place. The current MTFS extends to 2028/29. The intention is to extend projections over the next term of Council in advance of the 2027 Local Government Elections. Annual provision of Scottish Government funding information for Councils places constraints on the quality of MTFS projections. Scenario planning in this area has been developed and will be considered further. Ensure that assessments of medium- and longer-term financial sustainability, including reference to specific indicators, are a central focus of reporting to elected members. MTFS projections are presented to Members formally during each financial year with informal engagement, particularly at the Business Transformation Steering Group, supporting this. The use of sustainability indicators needs to be developed and these will be included in the next iteration of the MTFS. Page 45 of 246
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4 Report Implications (Resource, Digital and Risk) 4.1 Resource None 4.2 Digital None 4.3 Risk None 4.4 Ensuring Equalities (if required a separate IIA must be completed) None 4.4 Additional Report Implications (See Appendix A) See Appendix A Appendices Appendix A – Additional Report Implications Appendix B – Local Government in Scotland Financial Bulletin 2024/25 Page 46 of 246
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APPENDIX A – Report Implications A.1 Key Priorities within the Single Midlothian Plan Not applicable 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 Not applicable A.5 Involving Communities and Other Stakeholders Not applicable A.6 Impact on Performance and Outcomes Not applicable A.7 Adopting a Preventative Approach Not applicable A.8 Supporting Sustainable Development Not applicable Page 47 of 246
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Local government in Scotland Financial bulletin 2024/25 Prepared by Audit Scotland January 2026 Page 49 of 246
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2Local government in Scotland: Financial bulletin 2024/25 Contents Key facts 3 Key messages 4 Recommendations 6 Introduction 7 1. Council funding and financial performance 9 2. Financial position and outlook 24 Appendix 37 Accessibility You can find out more and read this report using assistive technology on our website www.audit.scot/accessibility. Page 50 of 246
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3Key factsKey facts Key facts Funding and budgets 1% Annual real-terms increase in funding from the Scottish Government to all 32 councils in 2024/25 24% Proportion of Scottish Government revenue funding that was ring-fenced or directed towards national policy commitments in 2024/25, up from 21 per cent in 2023/24 £542m Budget gap identified by our sample of 28 councils at the start of 2024/25. The 2023/24 comparator for those councils was £744 million £647m 2025/26 budget gap forecast by all 32 of Scotland’s councils Financial performance 1% Real-terms increase in 29 councils’ total revenue funding and income in 2024/25 compared to 2023/24 12 out of 29 Councils that reported overspends against their agreed General Fund revenue budgets 28 out of 30 Councils that reported underspends against their agreed General Fund capital budgets 23 out of 25 Councils that reported underspends against their agreed HRA capital budgets Financial position £21.9bn Councils’ net debt in 2024/25, a 13.5 per cent increase since 2023/24. Councils’ long-term external debt includes £14.9 billion borrowed directly from the Public Works Loan Board 7% Annual decrease in usable reserves between 2023/24 and 2024/25 16 out of 30 Councils that made unplanned use of reserves in 2024/25 85% Proportion of the General Fund that is committed, a two percentage point increase from 2023/24 Page 51 of 246
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4Key messages Key messages Key messages Key messages Despite increased funding in 2024/25, the financial outlook for Scotland’s councils presents substantial challenges. The costs of delivering services continues to rise, debt is increasing, reserve levels are falling and there is continued reliance on non-recurring measures to close significant budget gaps. This all raises concerns around councils’ medium-term financial sustainability. 1 In 2024/25, councils’ total revenue funding and income increased by 1.3 per cent. Despite this, councils faced a £542 million budget gap and remained reliant on reserves and savings to balance their budgets. Councils identified around £200 million of predominantly recurring savings to help manage overall financial pressures. 2 Despite being largely successful in implementing the actions agreed to manage budgets, with around 90 per cent of savings targets delivered, the sector reported a collective overspend against their agreed revenue budgets for the first time in six years. Around a third of councils reported that they overspent against their agreed revenue budgets and many struggled to deliver recurring savings, instead taking one-off measures to manage their in-year spending. 3 In 2024/25, most councils spent less than planned on capital projects but invested around £3.5 billion in both existing and new public assets. Reduced capital funding meant councils continued to rely on borrowing to finance increasingly expensive projects and, alongside changes to how they account for leases, have seen their total debt increase by over £2.5 billion in a year. Councils now spend around £1.2 billion a year servicing these debts, with future borrowing requirements also increasing.Page 52 of 246
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Key messages 5 4 There are increasing indications that councils are struggling financially, with a collective budget gap of £647 million identified when budgets were set for 2025/26. Costs continue to outpace funding increases, and there remain significant commitments on funding to fulfil both statutory duties and national policy commitments. There is also continued reliance on non-recurring measures, such as using reserves, to address budget gaps which is simply not sustainable. Technical changes have contributed to rising debt, but there is also a need to recognise that borrowing is forecast to increase, and this comes with associated costs. Councils need to take urgent action to address the sustained and recurring cost pressures associated with delivering services. This will mean carefully considering where services need to be reduced; how service delivery can be fundamentally reconfigured; who is eligible to receive services; and policies on fees and charges. Page 53 of 246
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6RecommendationsRecommendations Recommendations In 2026, councils should take action to progress significant outstanding recommendations from previous years around the transparency of financial reporting: • councils must continue to improve the clarity and comprehensiveness of their reporting on savings performance within their management commentaries, including the provision of comparisons to targets agreed during budget-setting, and whether savings made were recurring or non-recurring (paragraph 35) • councils should clearly explain within their management commentaries, and within reports to elected members, how future revenue budgets will be impacted by investment decisions and capital underspends (paragraph 39). In addition, councils should: • ensure that their longer-term capital investment plan, and the impact that capital underspending, programme slippage and changes to overall indebtedness arising from accounting changes have had on their overall financial position, is reported clearly and in a timely manner to elected members (paragraph 44) • ensure that reserves policies are current and remain fit for purpose, and that where agreed minimum reserves levels are breached, or forecast to be breached, there is a clear and time-bound plan for recovery (paragraph 53) • continue to work with their appointed auditors to ensure that they produce annual financial statements in a timely manner, as the sector continues its recovery to meet statutory reporting deadlines (paragraph 59) • ensure that long-term financial plans (over five years), that adequately consider risks to financial sustainability and include detailed scenario planning, are in place (paragraph 66) • ensure that assessments of medium- and longer-term financial sustainability, including reference to specific indicators, are a central focus of reporting to elected members (paragraphs 80–83). We note progress against all the recommendations from our Financial bulletin 2023/24 in the Appendix. Page 54 of 246
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7Introduction Introduction 1. This report is part of a series of overview outputs produced by the Accounts Commission which together provide an independent overview of financial and operational performance of Scotland’s local government sector. 2. The report examines council’s financial performance in 2024/25. The bulletin sets out: • councils’ funding, income and budget-setting • councils’ financial management and performance • councils’ financial position at the end of 2024/25 and the financial outlook. 3. We will shortly publish a brief supplement analysing the recently published 2026/27 Scottish Budget and levels of funding to councils. In spring 2026, we will publish our annual detailed briefing examining the 2026/27 budgets set by councils, including analysis of anticipated budget gaps, actions to address these, and the decisions made by councils when setting their budgets. 4. We are also reintroducing checklists for elected members to our regular annual financial reports. It is increasingly important that elected members understand the financial pressures facing their own councils, and the impact these may have on future priorities and service delivery. The checklist includes a range of questions to consider that are linked to the content of this report and is designed to support councillors in both decision-making and the scrutiny of decision-making. Methodology 5. The primary sources of information for this report are councils’ 2024/25 accounts and annual audit reports, a data request issued to councils in October 2025 and Scottish budget documents. 6. Our findings are based primarily on: • The 2024/25 annual accounts for 29 councils (15 audited and 14 unaudited). At our December deadline, 2024/25 accounts were unavailable for three councils (Clackmannanshire, East Dunbartonshire and Stirling). These councils are not included in our 2024/25 analysis (or comparisons to previous years for analysis based primarily on accounts). Page 55 of 246
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Introduction 8 • Supplementary information from 30 councils collected via a data return issued to council directors of finance and reviewed by appointed auditors. At our November deadline, a data return was unavailable for Inverclyde and Stirling councils. We also utilised elements of data returns previously submitted to us in support of our Local government budgets 2024/25 briefing and other more recent reports. Where we use these previous returns, we have adjusted our sample to reflect the 28 councils that we have comparable data for across both 2023/24 and 2024/25. • Our analysis of Scottish Government funding sets out the position for all 32 of Scotland’s councils. Within this report, we analyse Scottish Government budget documents up to and including the 2025/26 Autumn Budget Revision (published in October 2025). Due to the timing of the 2026/27 Scottish Budget, this analysis will be updated and extended to include the 2026/27 Budget information within a complementary supplement to this report. • This year we have also worked to develop our use of balance sheet information, wider intelligence and indicators developed by CIPFA directors of finance to better analyse the financial sustainability of the sector and highlighted specific areas that councillors may wish to consider when setting their own council’s budget for 2026/27. 7. When looking at trends, we convert some figures to real terms. This adjusts financial information from past and future years to prices for the year under review (ie, 2024/25). This is to take account of inflation so that trend information is comparable. To adjust for inflation, we use gross domestic product (GDP) deflators, which are published quarterly by HM Treasury. GDP deflators are the standard approach adopted by both the UK Government and Scottish Government when analysing public expenditure. 8. Financial trend data (both capital and revenue) relating to funding, income or expenditure will generally be shown in real terms. Financial information from the councils’ accounts’ balance sheets remains unadjusted. This includes trend analysis on reserves, sources of capital finance, borrowing and debt. These are not adjusted to real terms as they are already subject to revaluations within councils’ accounts to reflect current prices. 9. Throughout the report we refer to timescales in the short term as 1–2 years, medium term as 3–5 years and long term as over five years. Page 56 of 246
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91. Council funding and financial performance 1. Council funding and financial performance Total funding and income increased in 2024/25, but councils again had to apply a series of measures to bridge budget gaps. The Scottish Government increased funding to councils in 2024/25 and 2025/26 10. Councils are reliant on direct funding from the Scottish Government which represents around two-thirds of their overall income. Typically, councils receive a draft single-year funding allocation announced alongside the Scottish budget, normally in December each year. An initial settlement is then agreed once the Scottish budget has been formally approved by the Scottish Parliament. Throughout the year, this initial settlement is subject to revision, with substantial in-year transfers provided during the autumn and spring budget revisions. The Scottish budget The Scottish Government normally publishes its draft budget in December, outlining provisional allocations to local government. For 2026/27, this was delayed to January 2026 due to the timing of the UK Government’s Budget. The Accounts Commission will publish a supplement to this report in February 2026 analysing the initial 2026/27 funding allocation to local government. Within the Scottish Government budget, funding for councils is shown as part of the Finance and Local Government portfolio. Councils, however, also receive funding from other portfolios, for example the Health and Social Care and Education and Lifelong Learning portfolios. The local government settlement shows the totality of this funding. Transfers from other portfolios are then formally accounted for at a Scottish Government level during the autumn and spring budget revisions. Initial funding is also subject to changes as additional funding may become available to the Scottish Government throughout the year, which may be allocated to councils. Scottish Ministers may also reprioritise funding from other portfolios to councils during the year. Page 57 of 246
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1. Council funding and financial performance 10 11. In 2024/25, the Scottish Government initially provided councils with £12.5 billion of revenue and capital funding at the draft budget stage within its Finance and Local Government portfolio. Councils received £1.5 billion of additional funding and internal transfers (as outlined within the original local government settlement) at the 2024/25 autumn budget revision. This included funding to support agreed pay deals for teachers and social care staff and for councils that agreed to freeze council tax rates. A further £0.3 billion was then provided to councils as part of the spring budget revision. The 2024/25 final outturn allocation meant that funding ultimately increased by one per cent in real terms compared to the total year-end funding provided in 2023/24. 12. The 2025/26 draft budget saw a further increase within the local government budget, taking funding to councils to £13.6 billion in cash terms (£13.2 billion in 2024/25 prices). The 2025/26 autumn budget revision provided councils with £1.5 billion in additional funding and planned in-year transfers, meaning total 2025/26 Scottish Government funding to councils increased by five per cent in real terms from the same point in the prior year (Exhibit 1, page 11). 13. The Scottish Government published its 2026/27 draft budget in January 2026, estimating that there is a two per cent real terms increase in the total funding it is providing to councils. We intend to report on a further analysis of the draft 2026/27 budget within a supplement to this report which will publish in February 2026. The 2026/27 budget process will reflect the recently agreed Draft Fiscal Framework for Local Government 14. The Verity House Agreement included a commitment to reduce the level of ring-fenced funding, with the aim to provide councils more flexibility in how to allocate resources. Councils also receive funding from the Scottish Government that, although not formally ring-fenced, is provided with the expectation that it is directed for specific purposes. 15. In 2024/25, the Scottish Government ‘baselined’ several ring- fenced specific grants into the general revenue grant, including the full £522 million of the specific revenue grant for early learning and childcare expansion. While the Scottish Government has fulfilled its commitment under the Verity House Agreement to reducing ring-fenced funding, councils still need to direct spending towards specific national policies and statutory duties, and this limits the discretion councils have over how to use elements of the GRG. Ring-fenced and directed funding amounted to £3.2 billion in 2024/25 (24 per cent of the total revenue funding to councils). This is higher than the 21 per cent of funding that was directed in 2023/24. Page 58 of 246
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1. Council funding and financial performance 11 Exhibit 1. Scottish Government funding to councils since 2019/20 in real and cash terms The Scottish Government has increased funding to councils by four per cent in real terms between 2019/20 and 2025/26, although funding was higher during the pandemic due to specific additional funding allocations. 0 4 8 12 16 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 Autumn Budget Revision Final outturn Cash terms Real terms – draft budget Cash terms – draft budget Real terms £ billion Additional Covid-19 funding (cash) £1.3bn £0.5bn Notes: 1. Real-terms analysis, with financial information adjusted to 2024/25 prices. The draft budget allocations above do not include transfers from other portfolios outlined within the local government settlement as they are formally accounted for in the autumn and spring budget revisions. 2. Data for 2025/26 remains provisional and will be subject to further adjustment to show final outturn. Source: Scottish Government budget documents 16. The Scottish Government and COSLA published the draft Fiscal Framework between Scottish Government and Local Government in October 2025. This reflects a commitment within the Verity House Agreement to establish a new funding relationship between the Scottish Government and councils. Key principles underlining the framework include: • Simplified funding settlement – Streamline the funding relationship between the Scottish Government and councils, with earlier engagement in the budget process to support better planning. Page 59 of 246
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1. Council funding and financial performance 12 • Baselining of specific grants – Further incorporation of ring- fenced revenue grants into the General Revenue Grant, providing councils with greater flexibility over local spending priorities. • Exploration of greater revenue-raising powers – Encourage further consideration of new ways that councils can generate additional income to help address financial challenges. • Multi-year funding settlements – When possible, councils will receive multi-year funding settlements to support wider strategic planning. 17. The fiscal framework will formally apply to the 2026/27 Scottish Government Budget, and we intend to report on how these commitments have been met within our upcoming supplementary work on the Scottish budget that will accompany this report. Total revenue funding and income increased by 1.3 per cent in 2024/25, but income generated from both council tax and business rates fell in real terms 18. In addition to direct revenue funding from the Scottish Government, councils receive funding and generate income to support their day-to-day spending from a variety of other sources. These include council tax and non-domestic rates (NDR, commonly referred to as business rates), but also fees and charges for using services and council house rents. 19. Overall, our analysis of 29 councils where 2023/24 and 2024/25 accounts were available shows that revenue funding and income increased by £0.3 billion in real terms (1.3 per cent). Due to the ‘baselining’ of specific funding into the GRG (paragraph 15), there was a large annual increase in this funding of around £1 billion (12 per cent), but this was partially offset by a commensurate reduction in other grants of around £0.6 billion (16 per cent) (Exhibit 2, page 13). 20. The Scottish Government elected not to make changes to NDR rates or reliefs in 2024/25. Alongside this, councils agreed to freeze council tax rates in return for funding from the Scottish Government, with the Scottish Government estimating this additional funding was equivalent to a five per cent increase in council tax. These decisions contributed to the income directly generated from both council tax and NDR failing to keep pace with inflation and falling in real terms by one per cent and three per cent respectively. 21. Similarly, despite increasing fees and charges in recent years, as outlined in Local government budgets 2024/25, Local government budgets 2025/26 and our recent Spotlight on culture and leisure services, the associated income generated has failed to keep pace with inflation and fell by over three per cent in real terms. Page 60 of 246
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1. Council funding and financial performance 13 Exhibit 2. Sources of council revenue funding and income in 2023/24 and 2024/25, in real terms There was a large increase in GRG and a reduction in other grants in 2024/25, related to baselining of funding, but overall, the proportion of funding from different sources was similar to recent years. (£0.2bn) (£0.2bn) (£1.4bn) (£1.5bn) (£1.8bn) (£1.7bn) (£2.9bn) (£2.8bn) (£8.8bn) (£9.8bn) (£3bn) (£3bn) (£3.5bn) (£3bn) Percentage 0 10 20 30 40 50 Interest receivable and similar charges Housing Revenue Account rent Customer and client receipts Grants (including Scottish Government and others) Council tax Non-domestic rates General Revenue Grant 1% 7% 8% 16% 13% 14% 40% 1% 7% 8% 13% 13% 14% 45% 2023/24 2024/25 Note: Figures subject to rounding Source: Councils’ annual accounts 2023/24 and 2024/25 Councils identified £542 million of budget gaps at the start of 2024/25, and agreed plans to close them 22. Councils set budgets in February and March for the financial year ahead, based on the initial settlement from the Scottish Government. At the time of setting their 2024/25 budgets, our sample of 28 councils identified a cumulative budget gap of around £542 million (£744 million in 2023/24). This gap represented approximately 3.1 per cent of the total net cost of services, which was a reduction from 2023/24 (4.6 per cent). Glasgow’s 2024/25 budget gap was outlier. However, this is due to a Page 61 of 246
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1. Council funding and financial performance 14 multi-year approach to addressing and reporting on their budget gap. The council is focused on addressing their three-year cumulative budget gap to 2026/27 and, as part of their 2024/25 budget, approved savings of £94 million over the three years to 2026/27, of which £34.7 million relates to 2024/25 as part of this longer-term plan. 23. A range of actions were identified by these councils to close the budget gap totalling £553 million (£755 million in 2023/24). Approved bridging actions were higher than the budget gap due to some councils identifying actions not only to address gaps, but also to enable specific spending. Exhibit 3 explains how around three-quarters of bridging actions included identifying recurring/non-recurring savings, using reserves and making use of financial flexibilities. Exhibit 4 (page 15) shows the decisions taken by individual councils to address their budget gaps. 24. In 2023/24, councils indicated they would close 19 per cent of their collective budget gap by raising council tax. In 2024/25, no councils raised council tax, reflecting the additional funding made available by the Scottish Government to support a council tax freeze (paragraph 20). 25. Despite increasing funding and measures taken locally to generate additional income, councils continue to face increasing costs and continuing financial pressures. As outlined within Local government budgets 2025/26, at the start of the current financial year, Scotland’s 32 councils identified budget gaps totalling £647 million. We consider the financial sustainability of the sector in greater detail within Part 2. Exhibit 3. The bridging actions 28 councils identified in their 2024/25 budgets Over half of councils’ planned bridging actions were recurring savings and the use of reserves. Bridging action 2023/24 £755 million, of which: 2024/25 £553 million, of which: Recurring savings £261 million (35%) £172 million (31%) Using reserves £211 million (28%) £141 million (25%) Non-recurring savings £25 million (3%) £43 million (8%) Financial flexibilities £69 million (9%) £60 million (11%) Other measures £189 million (25%) £137 million (25%) Source: Council data returns for budget bulletins (2024 and 2025) and councils’ annual accounts 2024/25 (audited and unaudited) Between 2020 and 2024, the Scottish Government permitted councils to make use of a range of financial flexibilities to manage financial pressures. One of these related to service concessions, including Public Private Partnerships (PPPs), and allowed councils to reprofile debt repayments. This offered an immediate benefit of significant one-off increases to reserves but these are not cash backed, and debt payments will need to be made for longer, deferring costs to later years which has implications for future revenue budgets. Page 62 of 246
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1. Council funding and financial performance 15 Exhibit 4. The bridging actions councils identified within their 2024/25 budgets as a proportion of net cost of services Over half of all bridging actions were made up of recurring savings and use of reserves across Scotland. 0 2 4 6 8 Scotland Highland Falkirk Moray South Ayrshire East Lothian Perth and Kinross Aberdeenshire Angus Eilean Siar North Ayrshire Argyll and Bute East Renfrewshire Aberdeen City Scottish Borders West Dunbartonshire West Lothian Dumfries and Galloway Dundee City East Ayrshire Renfrewshire South Lanarkshire Inverclyde North Lanarkshire Midlothian City of Edinburgh Fife Glasgow City Percentage Increase to council tax Increase to income Agreed savings recurring Agreed savings non-recurring Unidentified savings Use of reserves Financial flexibilites Other Scotland Note: In addition to three councils whose 2024/25 annual accounts or 2023/24 data return were unavailable, Shetland and Orkney are also excluded; both are outliers due to their high use of reserves to set their budgets, reflecting the councils’ regular use of returns from significant investments and harbour income. Shetland’s bridging actions made up 39 per cent of their net cost of services (79 per cent of which related to reserves use). Orkney’s bridging actions made up 15 per cent of their net cost of services (all of which was use of reserves). Bridging actions were identified as councils set their 2024/25 budgets and plans, so may have been reduced to reflect previously approved decisions and can also be subject to in-year changes. Source: Council data returns for budget bulletins (2024 and 2025) and councils’ annual accounts 2024/25 (audited and unaudited) Page 63 of 246
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1. Council funding and financial performance 16 Councils did not remain within their agreed revenue budgets in 2024/25, with more than a third of councils spending more than was planned 26. Councils set revenue budgets for General Fund services, which represent most council spending and include major services such as education and social care. The councils that own and maintain council housing also set a budget for their Housing Revenue Account (HRA). Councils generally set balanced HRA revenue budgets, with spending plans financed largely by rental income. 27. Based on information provided to us via supplementary data returns (detailed revenue data for 29 councils), councils managed net revenue budgets of around £16.1 billion in 2024/25, compared to £15.6 billion in 2023/24. 28. Eleven councils reported an overspend against their total revenue budgets, and overall, councils reported a revenue budget overspend of £16.8 million in 2024/25 (0.1 per cent): • 12 councils overspent against their General Fund revenue budgets and, collectively, councils reported a £19.4 million (0.1 per cent) overspend against General Fund revenue budgets totalling £16.1 billion. • Councils planned to spend £1.6 billion on housing services, including transfers to fund capital investment, and reported an overall overspend of £24.8 million (1.6 per cent). HRA income, however, was £27.4 million higher than budgeted, resulting in a net HRA revenue underspend of £2.6 million. 29. Of the 30 councils where there was available data, 15 reported an overspend on the social care services they deliver on behalf of Integration Joint Boards (IJBs) totalling around £49 million. This was due to increased demand for care packages, both home and residential, alongside an increasing cost for these services. At the same time, several councils reported service level underspends across a range of services (Exhibit 5, page 17). We will publish our annual IJB Financial bulletin 2024/25 in February 2026 which will set out in more detail the financial status of, and outlook for, IJBs. 30. This is the first time an overall overspend for the sector has been reported in the last six years. Between 2019/20 and 2023/24, councils reported an overall underspend; however, the size of the underspend had been decreasing in recent years, and was only 0.2 per cent in 2023/24. Page 64 of 246
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1. Council funding and financial performance 17 Exhibit 5. Councils’ overspends and underspends at a service level and reasons for them Almost all councils reported overspends in 2024/25, with less reporting underspends. Service area Reasons for Overspends • Overspends were reported across a wide range of services, particularly within adult social care services, education, children and families, housing and properties and facilities. • Service area overspends were mostly attributed to increased costs of providing services including inflationary pressures, and increasing demand for services. • For education services, staffing for teacher cover and an increase in additional support needs were identified by several councils as a reason for overspend. Underspends • Corporate support areas were the most prevalent areas of underspend. • Education also showed many areas of underspends including workforce vacancies and specific funding. • Workforce issues, such as recruitment freezes, staff vacancies due to difficulty in recruiting, particularly in education. • Delays and slippages in projects were also a prevalent reason for underspends this year (which will have costs in future years). Source: Council data returns Councils achieved significant savings, with a third meeting their full savings target; but some councils continue to rely on one-off measures to make savings 31. From a sample of 30 councils, 29 set a savings target in 2024/25, totalling £376.2 million, and achieved £338.2 million of this (89.9 per cent). Similar to 2023/24, of those councils that set a savings target, ten met their full target and 17 achieved 70 per cent or more. Two councils (Aberdeenshire and Midlothian) achieved less than 70 per cent of their savings target in 2024/25; both reported a revenue budget overspend, but only one (Aberdeenshire) would have broken even if its savings target had been achieved. 32. There is, however, variation in both the scale and ambition of savings targets across individual councils. Based on the 28 councils in our sample that set savings targets and provided revenue budget Page 65 of 246
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1. Council funding and financial performance 18 data, savings achieved were equivalent to 2.2 per cent of total revenue budgets. Shetland Islands, however, achieved savings equivalent to 4.7 per cent of their revenue budget while Dumfries and Galloway achieved savings equivalent to only 0.6 per cent of their revenue budget. 33. Twenty-eight of the 29 councils that set saving targets split these targets into recurring and non-recurring savings. Where we have a breakdown of how savings were achieved, 86.3 per cent (£270 million) were achieved on a recurring basis and 13.7 per cent (£42.9 million) were non-recurring. This compares to 85.5 per cent recurring savings in 2023/24. The split of recurring and non-recurring saving, however, varied widely among councils, with seven councils relying heavily on one-off measures to make in-year savings (Exhibit 6, page 19). Using non- recurring savings to balance council budgets is not sustainable over the longer term. 34. In our 2023/24 Financial bulletin we recommended that councils should report on savings made within their management commentaries more comprehensively, including provision of comparisons to savings targets agreed during budget-setting, and whether they were recurring or non-recurring. 35. Councils are still not adequately reporting on savings within their management commentaries, and only two councils disclosed whether savings were of a recurring or non-recurring nature. While some councils report on progress against savings targets, the level of detail provided can be limited. Councils spent almost £3.5 billion on capital investment in 2024/25, with increased spending supported largely by borrowing 36. The value of councils’ physical assets increased in 2024/25, with property, plant and equipment increasing by around £3.5 billion (to £53.7 billion). This increase in value reflects both ongoing investment and changes to how councils account for leased assets (International Financial Reporting Standard 16 (IFRS 16): Leases, page 23). 37. Councils remain reliant upon borrowing to finance their investment in new assets as capital grants reduce, with increased reliance also being placed upon using internal funds and transfers from revenue budgets. According to our sample of 30 councils providing information via the data return, overall capital expenditure was £3.4 billion in 2024/25, a 7.9 per cent annual increase. Of this, £2.2 billion was related to General Fund projects and £1.2 billion was spent on HRA housing projects. Page 66 of 246
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1. Council funding and financial performance 19 Exhibit 6. Percentage of revenue savings targets achieved in 2024/25, split by recurring and non-recurring savings Some councils relied heavily on non-recurring, one-off measures to make in-year savings in 2024/25. Percentage of savings target achieved 40 60 80200 100 Scotland (29 councils) Dundee City East Ayrshire Orkney Islands West Lothian West Dunbartonshire Renfrewshire South Lanarkshire Perth and Kinross Falkirk North Lanarkshire Glasgow City Dumfries and Galloway Eilean Siar Moray City of Edinburgh Angus East Dunbartonshire Highland East Lothian Aberdeenshire Midlothian Argyll and Bute Shetland Islands Clackmannanshire Scottish Borders North Ayrshire East Renfrewshire South Ayrshire Aberdeen City Recurring savings Non-recurring savings Split not available Scotland (29 councils) Note: Inverclyde and Stirling councils did not provide a data return and have been excluded from this exhibit. Ahead of setting its budget for 2024/25, Fife Council took steps to close its budget gap and therefore did not set an additional savings target for 2024/25. Source: Council data returns Page 67 of 246
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1. Council funding and financial performance 20 38. There is also continued reliance upon funding released from the use of financial flexibilities relating to accounting for Public Private Partnerships (PPPs). By extending repayment periods for these contracts, councils reduced immediate debt costs and eased annual budget pressures. Recognising prior year overpayments further helped councils manage contract costs more flexibly in their financial planning. In turn, this meant councils increased their usable reserves, allowing these to be used to finance other investment, and reducing the annual impact of PPP payments on capital budgets (Exhibit 7). Exhibit 7. Capital expenditure split by sources of finance in cash terms, 2023/24 and 2024/25 Borrowing and grants remain the most significant sources of capital finance but borrowing again increased to offset further reductions in capital grants. Other contributions and Public Private Partnership (PPP) Internal loans fund repayments available to reinvest Government grants Capital receipts Capital Funded from Current Revenue (CFCR) An increase in borrowing 2023/24 2024/25 £ million -0.5 0 0.5 1 1.5 2 Note: Internal loans fund repayments are an annual charge that recognise capital costs in the revenue budget. Once repaid, they allow borrowed funds to be used elsewhere. Capital receipts are income councils generate from selling existing assets. Revenue transfers are capital expenditure funded from service revenue budgets. Source: Councils’ annual accounts 2023/24 and 2024/25 Page 68 of 246
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1. Council funding and financial performance 21 Despite this increased investment, councils again underspent on their capital budgets 39. Overall, councils reported a budget underspend of £704.4 million or 17.2 per cent of the capital budget in 2024/25. This is less than the underspend reported in 2023/24 (21.3 per cent) and in any of the previous three years. Underspends were reported for both General Fund (21.7 per cent) and HRA capital programmes (7.9 per cent). 40. Twenty-eight out of 30 councils underspent against their General Fund capital budgets in 2024/25 (Eilean Siar reported a balanced position, while Glasgow City reported a small overspend). Not all councils build, own and maintain council housing due to having previously transferred housing stock to housing associations. Of those councils that do have housing stock, and therefore operate an HRA, 23 out of 25 reported underspends against their HRA capital budgets in 2024/25 (City of Edinburgh and East Lothian were the only councils that reported overspends due to accelerated programmes of works). 41. The main reasons for these underspends were slippage in projects, due to capacity and supply chain issues, with capital spend reprofiled into future years. Time taken for procurement of projects was also a prevalent reason for underspends. A large number of the capital projects that slipped this year were within HRA and housing programmes, but school and large infrastructure projects also showed underspends largely due to delays. 42. The main challenges councils reported through the data return in delivering capital programmes over the next five years were: • affordability – managing the rising costs due to inflation contributing to high and growing material and labour costs • the risk of higher interest rates on borrowing for capital projects • the reliance on funding which can come with limitations and uncertainty for the future • a lack of workforce capacity to manage and run several capital projects. 43. Each year, we ask auditors to consider a specific Best Value theme as part of their annual audit work and then report nationally on the findings of this. For 2025/26 audits, which are scheduled to conclude and report later in 2026, we have asked auditors to consider councils’ approaches to asset management and will report nationally on this in spring 2027. 44. All councils who provided a data return reported having a multi-year capital plan in place, with most plans spanning five or more years (25 out of 30 councils). Most councils include information on their capital plans Page 69 of 246
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1. Council funding and financial performance 22 within their management commentaries but, as with information on savings, the level of detail varies. Few provide comprehensive insights into anticipated expenditure, key projects and future challenges. This could hinder the ability of decision-makers to make informed choices on how best to manage finances. It is important that councils are open and transparent in their reporting to the public and wider stakeholders. 45. Further use of external borrowing, capital underspends and the impact of IFRS 16 implementation on councils’ financial position underlines the importance of considering the impact of current decision-making on longer-term capital investment strategies and plans (International Financial Reporting Standard 16 (IFRS 16): Leases, page 23). An update on the Learning Estate Improvement Programme (LEIP) and Public Private Partnership (PPP) contract management 46. Councils continue to progress investment in their school estates, via participation in the Scottish Government’s Learning Estate Investment Programme (LEIP). The launch of Phase 3 of the programme confirmed that 47 schools will be eligible for funding under the programme, with construction or refurbishment costs being part funded by the Scottish Government using an outcomes-based 25-year funding model. 47. Fourteen projects have been completed and are now operational, with a further 16 under construction and 17 at the design stage. Procurement processes and construction times associated with such projects means that it is increasingly unlikely that the programme will be completed by the original planned date of 2027. 48. These delays also mean that there is a lack of certainty around overall construction costs, which councils must fund, as well as the allocation of ongoing Scottish Government outcomes-based funding for individual projects (which are not yet fully finalised as they are based upon project costs). 49. Alongside management of the LEIP programme, councils continue to manage the operational aspects of a variety of PPP contacts, including Public Finance Initiative (PFI) contracts. Earlier PFI contracts are now nearing their end, with eight set to expire by the end of 2030. Councils are actively preparing for, or managing, complex exit arrangements. 50. In the 2024/25 Annual Audit Reports we have reviewed (sample of 15), auditors did not raise any concerns around PFI contract expirations that are in process. However, all reports highlighted the application of IFRS 16 as a significant audit risk. Additional audit procedures were undertaken to mitigate this risk, and while some issues were identified, none were considered material. Page 70 of 246
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1. Council funding and financial performance 23 International Financial Reporting Standard 16 (IFRS 16): Leases Councils prepare their accounts under the Code of Practice on Local Authority Accounting, published annually by CIPFA/LASAAC. The Code is prepared under International Financial Reporting Standards (IFRS). Implementation of IFRS 16 became mandatory for councils under the Code in 2024/25, changing how councils need to account for existing and new leases. Notably this includes Public Private Partnership (PPP) contracts. For some leases (finance leases), including PPP contracts, councils already recognised an asset and corresponding lease liability on their balance sheets. The main impact of the new requirements therefore is that, for arrangements previously accounted for as operating leases, a right-of-use asset and a lease liability must now be recognised on council’s balance sheets. What IFRS 16 means for councils In a small number of cases, the application of IFRS 16 resulted in delays to draft accounts, or drafts accounts being issued where elements of the changes had yet to be applied. As IFRS 16 has not been retrospectively applied, from our sample of 15 audited sets of accounts and 14 unaudited sets of accounts, 2024/25 has seen: • the value of councils’ assets increasing by £3.5 billion, with £0.4 billion of this due to recognising ‘right of use assets’ under IFRS 16 • an increase in total debt of £2.5 billion (£0.5 billion increase in long-term liabilities), with £0.8 billion of this overall movement due to recognising remeasured PPP liabilities under IFRS 16 • this recognition of both assets and liabilities impacting councils’ Capital Financing Requirements (CFRs), with £0.9 billion of the annual increase of £2.1 billion attributable to IFRS 16 implementation. 2024/25 audit work on IFRS 16 implementation In 2024/25, all appointed auditors recognised the implementation of IFRS 16 as a significant risk for councils and carried out additional audit testing and procedures as part of their work. Auditors identified a range of issues in how IFRS 16 related changes were reflected within draft accounts. In all cases, however, corrections were either made by councils, or any uncorrected misstatements were not material to the accounts. No auditors modified their audit opinions due to IFRS 16 implementation. Overall, the conclusion from 2024/25 audit work reported to date is that councils appropriately reflected the impact of IFRS 16 in their final accounts. It has, however, directly impacted debt levels which councils must consider alongside other key factors within both their capital and borrowing and treasury management strategies. It is therefore important that all councils consider the continued affordability of their longer-term capital investment strategies and plans. Page 71 of 246
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242. Financial position and outlook 2. Financial position and outlook Councils face substantial challenges in maintaining their financial sustainability over the medium term. A decrease in usable reserves in 2024/25, most of which are committed for specific purposes, limits councils’ flexibility in dealing with emerging pressures and increases overall financial risk. Councils’ usable reserves have decreased since 2023/24 51. Councils often use reserves as a way of managing their finances, for example helping to support service transformation to support future savings. Because reserves are a one-off resource, councils must plan their use carefully. As budgets come under greater pressure from cost pressures and increasing demand, it is critical that councils understand the risks of using reserves to manage short-term budget pressures. 52. In 2024/25, usable reserves decreased from £4.1 billion in 2023/24 to £3.8 billion (Exhibit 8, page 25). This follows a period where usable reserves have been increasing, from £2.7 billion in 2019/20, that was attributable largely to increased funding and the use of financial flexibilities that were introduced in response to the Covid-19 pandemic. The annual decrease in usable reserves is due to a slight decrease in capital reserves and a larger (ten per cent) decrease in usable revenue reserves. The £3.8 billion of usable reserves held by councils at the end of 2024/25 equates to 22 per cent of their net cost of services. 53. Supplementary information provided to us via data returns shows that 25 out of 30 councils made planned use of their reserves in 2024/25 (around £325 million) to balance their budgets, meet statutory obligations and to fund one-off pressures. Sixteen councils also made unplanned use of reserves (around £78 million). This compares to 12 out of 30 councils in 2023/24. This unplanned use of reserves was mainly to mitigate service overspends or to address specific financial pressures. Page 72 of 246
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2. Financial position and outlook 25 Exhibit 8. Councils’ usable reserves, 2019/20, 2023/24 and 2024/25 Usable reserves remain higher than pre-pandemic but have seen a decline in the last year. 2019/20 2023/24 2024/25 £2.1bn £3.6bn Revenue Capital £3.3bn 2019/20 2023/24 2024/25 £0.6bn £0.6bn £0.5bn Note: Figures subject to rounding. Source: Councils’ annual accounts 2019/20 to 2024/25 (audited and unaudited) Eighty-six per cent of General Fund reserves are committed for specific purposes, impacting the level of contingency funding available to manage emerging pressures 54. The General Fund is the principal usable revenue reserve held by councils. It can be used for a wide range of purposes, including bridging budget gaps by supporting both day-to-day service spending and elements of capital spending. It therefore represents the most readily available reserve for managing financial pressures. 55. Councils, however, also commit or earmark elements of the General Fund, identifying where it will be used for a specific purpose. Notably, the recent trend in General Fund increases since 2019/20 was driven almost exclusively by committed funds. This means that while, overall, the General Fund was increasing, uncommitted usable reserves have been decreasing as a proportion of spending (Exhibit 9, page 26). Page 73 of 246
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2. Financial position and outlook 26 Exhibit 9. Councils’ General Fund balance between 2019/20 and 2024/25, split by committed and uncommitted General Fund reserves have declined with 86 per cent committed in 2024/25. 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 £0.9bn £1.9bn £2.3bn £2.4bn £2.4bn £2.2bn£0.4bn £0.5bn £0.4bn £0.5bn £0.5bn £0.4bn General Fund uncommitted General Fund committed Source: Councils’ annual accounts 2019/20 to 2024/25 (audited and unaudited) Annual overspends, and a reliance on reserves, means that a number of councils are now in breach of their own reserves policies and are taking action to address this 56. Based on information provided to us via supplementary data returns, 28 out of 30 councils have reserve policies in place, with the majority (27) setting out a minimum level of uncommitted reserves ranging between 0.4 and three per cent of budgeted net revenue expenditure. Some councils base their minimum level on a set monetary value, rather than a percentage of expenditure; this includes three councils where the minimum level is less than two per cent of budgeted net revenue expenditure. Shetland Islands and Eilean Siar are the only councils in the sample that do not have a formally agreed reserves policy in place. 57. Five councils had uncommitted reserves below their locally agreed minimum in 2024/25 (Dundee City, City of Edinburgh, Glasgow City, South Ayrshire and West Dunbartonshire). These councils explained the reasons for this as in-year overspends, with City of Edinburgh, South Ayrshire and West Dunbartonshire indicating that they intend to bring the levels of uncommitted reserves back to target levels for 2025/26. Page 74 of 246
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2. Financial position and outlook 27 Minimum reserve levels are put in place to not only meet statutory duties but to ensure financial stability, ie ensuring that there is a buffer for unplanned spends. If councils breach their minimum reserves levels this could be a sign that they are reliant on using one-off reserves for recurring needs. 58. A review of councils’ management commentaries shows that all councils clearly identify key reserve areas and explain their purpose. Most councils also specify their minimum reserve level, with those who do not set a minimum level providing justification for their approach. Councils must improve the transparency of their financial reporting 59. As part of good financial management and governance, councils should report on their finances in a clear and timely manner. At the time of publishing this report, not all 2023/24 council audits are complete, with two (Clackmannanshire and East Dunbartonshire) remaining outstanding. This year, 15 councils met the statutory deadline of 30 September for preparing audited 2024/25 accounts. At this point, no 2024/25 annual accounts have been qualified or modified by appointed auditors. Four councils (Aberdeenshire, Clackmannanshire, East Dunbartonshire and Stirling), however, failed to meet the 1 July deadline to have their unaudited accounts available for public inspection. 60. Within the sample of 2024/25 Annual Audit Reports, most councils were judged to be open and transparent in their financial reporting. The auditor of one council identified that its financial reports did not support effective scrutiny, as they were highly technical and not sufficiently tailored for members without a financial background. A recommendation was subsequently made that the council should improve reporting to present key financial information such as budget reports, savings measures and borrowing in an understandable and consistent way, including summary information, to better inform decision-making and allow for scrutiny from elected members. The council agreed to take action to address this recommendation, with the underlying principle applicable to all councils. 61. Our review of management commentaries found these were generally clear and understandable, and consistent with the annual accounts. However, there was a general lack of clarity about who was involved in making judgements on financial sustainability. This is important to demonstrate good governance, transparency and accountability. Page 75 of 246
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2. Financial position and outlook 28 Councils are forecasting continuing financial pressures over the medium term which present risks to financial sustainability 62. Councils face significant risks to their financial sustainability which can be influenced by external pressures. These include demographic changes and rising demand for services (particularly within social care), ongoing workforce challenges (the subject of our August 2025 report Delivering for the future: Responding to the workforce challenge), and current immediate pressures such as homelessness. Additionally, the implementation of new and existing Scottish Government policies without sufficient further funding can add to existing challenges. 63. Within the supplementary data returns we issued, and publicly, councils reported a range of specific financial risks as possible challenges for their financial sustainability over the next five years. Common issues highlighted include: • Future funding: all councils have highlighted single-year settlements, any potential reductions in government grant funding and ring-fencing of funds as major challenges. The draft ‘Fiscal Framework between Scottish Government and Local Government’ has a stated aim of addressing the uncertainty arising from single- year settlements (paragraph 16). • Additionally, future reductions in capital grants could mean that already constrained capital programmes would need to be scaled back or redesigned, impacting the availability of assets essential for service delivery. This comes at a time when demand for services continues to rise. • Inflationary pressures: councils are reporting existing inflation pressures as well as economic uncertainty over future inflation and interest levels as a main challenge. They are also facing pressures with increased service demand and the associated rising costs of goods and services, as well as a risk of rising borrowing and capital financing costs related to increased borrowing being needed to finance projects due to increasing costs and construction inflation. • Pay settlements/awards: councils expressed concern about uncertainty of how future pay awards might be financed. They reported that a lack of certainty as they negotiate future pay awards creates a challenge for financial planning. This includes financial pressures arising from increased employer’s National Insurance contributions from 2025/26 onwards. • Council tax: a council tax freeze was implemented in 2024/25, and while there was no council tax freeze in 2025/26, councils have highlighted the uncertainty around future council tax rates as a significant challenge for medium-term financial planning. Councils also identified that this risk is heightened by their limited capacity to introduce new local taxes, leaving them reliant on council tax income. Page 76 of 246
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2. Financial position and outlook 29 • Savings: identifying and achieving additional recurring savings after implementing substantial savings in recent years was identified as a challenge by some councils. • Reserve levels: two councils reported that low reserve levels and reliance on reserves to fund recurring expenditure, potentially reflecting difficulties in controlling their base costs. 64. In Local government budgets 2025/26, we reported that Scotland’s 32 councils identified a budget gap of around £647 million at the time of setting their 2025/26 budgets, with a projected cumulative budget gap to 2027/28 of £997 million. With financial pressures forecast to continue, it is important that councils proactively seek to manage these financial pressures to maintain delivery of services. Councils have medium-term financial plans in place, but must continue to prioritise service transformation to achieve financial sustainability 65. Having robust medium- and long-term financial plans in place is essential in order for councils to maintain a clear understanding of financial risks, implement robust risk management processes to monitor them, and develop indicative forecasts supported by detailed scenario planning. 66. All 30 councils that provided a data return reported having medium-term financial plans in place, with the majority spanning 3–5 years (a small number cover a similar period but are due to be refreshed). Most councils reported that these plans link to their approach to using reserves over the medium term. Eleven councils also reported having a long-term financial plan in place spanning over five years. All councils should consider putting in place longer-term plans to help mitigate financial sustainability risks. 67. All councils present their medium-term financial plans within their management commentaries although few councils provide insights into their longer-term financial outlook. This lack of transparency has the potential to undermine wider understanding of the challenges councils are now facing in terms of their financial sustainability. The majority of councils that did report significant risks to financial sustainability highlighted uncertainties regarding future funding, pay settlements, inflation, cost pressures and rising service demand. 68. Given their financial challenges, councils must focus on service transformation and allocate adequate resources to ensure sustainability. Within our data return sample, 24 councils identified they hold committed/earmarked reserves for transformation work. Glasgow City, Orkney Islands, Shetland Islands, South Lanarkshire and West Dunbartonshire did not separately identify transformation funds within their reserves but councils may have other funds to progress Page 77 of 246
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2. Financial position and outlook 30 transformation. The total value held is around £269 million, which is around 12 per cent of the total General Fund committed balance and 1.5 per cent of the total net cost of services. The value held varies across councils, ranging from 0.4 per cent (Aberdeen City) to 9.7 per cent (Argyll and Bute) as a percentage of their net cost of services. 69. Most councils report on transformational change programmes in their management commentaries although the level of detail is varied. Some councils provide detail on specific projects within their programme plans and the progress against these. As part of their 2024/25 audit work, we asked auditors to consider the specific Best Value theme of Transformation as part of their annual audit work, following up on our October 2024 report Transformation in councils. We will report nationally on the findings of this work in spring 2026. Councils’ net debt has increased significantly, with an annual increase of £2.5 billion, partly driven by changes in how they account for leases, but also reflecting ongoing investment 70. In 2024/25, within the 29 sets of council accounts available, total debt increased to £23 billion (an annual increase of £2.5 billion). Accounting for investments, this means that councils’ net debt now stands at £21.9 billion (2023/24: £19.3 billion). The changes associated with IFRS 16 implementation, with a need to recognise lease liabilities, has contributed to this increased indebtedness (International Financial Reporting Standard 16 (IFRS 16): Leases, page 23). Councils again, however, increased the amount of money they borrowed to invest in new assets. Long-term external borrowing now sits at £15.5 billion (an annual increase of £1.2 billion). 71. Councils’ external debt comprises borrowing from a variety of sources. Temporary borrowing is often undertaken to manage cash flow, but longer-term borrowing and debt is associated largely with capital investment and the main sources of this are: • The Public Works Loan Board (PWLB) – a UK Government agency that provides long-term borrowing with relatively stable interest rates, linked to UK Government bonds. • Market loans – borrowing directly from the banks or other financial institutions, often undertaken at historical points where they were cheaper than PWLB loans. • Lender options/borrower options loans (LOBOs) – historic loans where the lender can periodically adjust the interest rates (lender option), providing councils with the choice to accept the new rate or repay the loan early (borrowing option). Page 78 of 246
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2. Financial position and outlook 31 72. As well as direct borrowing, councils also recognise a range of long-term liabilities associated with PPPs and other longer-term investment contracts which represent committed future repayments, with 2024/25 figures also now including adjustments related to changes in how leases, including PPPs, are accounted for. 73. Council debt is reported on their balance sheets at a carrying value equivalent to the outstanding principal plus any accrued interest. This means that the amounts reported can vary from the actual amount borrowed. We asked councils to provide supplementary information about the value of funds borrowed, as well as the sources of this funding. Alongside their reported long-term liabilities which are presented to show the discounted values of future payments (including outstanding payments under PPP contracts), this has allowed us to present the sources of debt for 30 councils (Exhibit 10). Exhibit 10. The types of debt held by councils in 2024/25 The vast majority of council debt related to PWLB loans undertaken to invest in physical assets and infrastructure. Total debt £23bn Public Works Loan Board £14.6bn (63%) Other long-term liabilities £4.3bn (19%) Temporary borrowing £1.9bn (8%) Lender Option Borrower Option £1.2bn (5%) Market debt £0.6bn (3%) Other source of borrowing £0.5bn (2%) Note: This exhibit is based upon 30 council data returns (excluding Inverclyde and Stirling councils). The gross and net debt figures in paragraph 70 are based on 29 sets of accounts (excluding East Dunbartonshire, Clackmannanshire and Stirling Councils). Source: Council data returns Page 79 of 246
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2. Financial position and outlook 32 Most council debt relates to loans from the PWLB that will need to be repaid when they end 74. In 2024/25, Scotland’s 32 councils had outstanding PWLB loans with a principal value of £14.9 billion, an increase of £1.9 billion in the amount they had borrowed from the previous year. The vast majority of outstanding PWLB loans, around £12.8 billion, were taken out on fixed-rate maturity terms. This means that over the length of the loan, councils pay defined interest payments every six months but, at the end of the loan, must then repay the principal amount they borrowed (Exhibit 11, page 33). 75. In practice this means that councils often borrow from the PWLB to repay earlier loans. Councils are scheduled to repay around £760 million of PWLB maturity loans in 2025/26, with a further £2.6 billion expected to be repaid over the next five years. At the same time, the interest rates on PWLB borrowing have been increasing, reaching the highest point in a decade. Alongside forecast increases in total borrowing, this is likely to result in increased interest and debt servicing costs, even if the current interest rates available are lower than the rates on loans that are maturing. Increased borrowing and interest rates mean that councils are now spending more to service their debt 76. Changing interest rates are having an impact on financing costs and councils’ financial position more widely. Councils paid £1.2 billion in interest in 2024/25, an increase from £1 billion the previous year. 77. Councils use Local Government Benchmarking Framework (LGBF) data to assess their financial sustainability (paragraph 80). Data for 2024/25 shows there has been an increase in the proportion of councils’ revenue budgets allocated to servicing debt in the General Fund, rising from 5.4 per cent to six per cent in the last three years. For the HRA, the proportion of the budget servicing debts cost is currently at 21 per cent, an increase of one percentage point over the last year. Significant borrowing is still required to finance past capital investment and to deliver planned capital investment 78. The capital finance requirement (CFR) is a measure of the cumulative amount of money a council needs to borrow to finance its capital expenditure. This means it usefully expresses the maximum potential amount of borrowing that a council may still have to undertake. In 2024/25 the cumulative CFR stood at £25.9 billion, an increase of £2.3 billion from 2023/24. Page 80 of 246
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2. Financial position and outlook 33 Exhibit 11. Scotland’s 32 councils had outstanding PWLB loans of £14.9 billion at the end of 2024/25 Loans of over £12.8 billion, around 86 per cent, were taken out on a maturity basis, meaning the amount borrowed will need repaid at the end of each loan. Aberdeen City Aberdeenshire Angus Argyll and Bute City of Edinburgh Glasgow City Clackmannanshire Comhairle Nan Eilean Siar Dumfries and Galloway Dundee City East Ayrshire East Dunbartonshire East Lothian East Renfrewshire Falkirk Fife Highland Inverclyde Midlothian Moray North Ayrshire North Lanarkshire Orkney Islands Perth and Kinross Renfrewshire Scottish Borders Shetland Islands South Ayrshire South Lanarkshire Stirling West Dunbartonshire West Lothian 0 500 1,000 1,500 £ million £14.9bn PWLB outstanding principal loans at the end of 2024/25 Maturity EIP Annuity Note: This exhibit presents the PWLB principal outstanding balance for each council. EIP means the borrower makes fixed repayments towards the principal each period, while the interest element changes over the duration of the loan, reducing the overall repayments each period. Annuity means the borrower makes fixed total repayments on both the principal and interest element of the loan over the loan period. The level of regular repayment towards the principal element of the loan will increase over the duration of the loan as the interest element decreases. Source: Analysis of PWLB annual data as at 31 March 2025 Page 81 of 246
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2. Financial position and outlook 34 79. Around £19.6 billion (76 per cent) of councils’ combined CFR at the end of 2024/25 related to the General Fund, with the remaining £6.3 billion attributable to HRAs. This means there was a slight annual increase in the proportion of the overall CFR relating to the HRA in comparison to the General Fund of 0.6 percentage points. Councils are assessing their own financial sustainability, and benchmarking against others to inform financial planning 80. Regular monitoring of their own financial sustainability allows councils to plan more effectively and manage their resources responsibly. To do this, councils make use of a range of indicators to assess their own financial sustainability. Based on data returns provided by 30 councils, the extent to which councils make use of both external and internal indicators varies, as they have discretion in how they monitor and assess their own financial sustainability: • All 32 councils submit data to the Local Government Benchmarking Framework (LGBF) and 25 councils actively make use of the LGBF financial sustainability indicators to some extent. Data for 2024/25 shows that both usable reserves and those uncommitted reserves available for immediate use have decreased over the last year. • Twenty-one councils use the CIPFA level of reserves measure. This compares the current level of reserves to the council’s net revenue expenditure. • Six use the CIPFA reserves sustainability measure. This assesses how long it will take for a council to use all their reserves if they continue to allocate as they have. • Eight use the CIPFA change in reserves sustainability measure. This monitors the change in a council’s reserves over a three-year period. 81. Most councils are reporting on their use of financial sustainability indicators within management commentaries. There is clear evidence that councils are actively assessing and monitoring their financial sustainability through practices such as budget monitoring and managing debt and borrowing. 82. All councils that submitted a data return confirmed that elected members were provided with a summary of medium- to long-term financial sustainability during 2024/25, with most presenting this within budget papers. Some councils also provide updates, varying between quarterly and annual reporting. Our review of management commentaries further shows that elected members are sighted on financial sustainability through budget papers, financial plans, and review of strategic risk registers, though the level of detail on what is included can be limited. The Local Government Benchmarking Framework (LGBF) includes six financial sustainability indicators: • The level of usable reserves as a percentage of the initially approved annual revenue budget. • The uncommitted General Fund balance as a proportion of the initially approved net revenue budget. • The share of a council’s General Fund net revenue stream (GRG, NDR and council tax income) budget spent on debt and financing costs. • The share of a council’s Housing Revenue Account rental income spent on debt and financing costs. • Revenue outturn compared to final budgeted revenue budget (General Fund and HRA, where applicable). • Approved use of reserves to address budget gaps as a percentage of net expenditure (new for December 2025). Page 82 of 246
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2. Financial position and outlook 35 83. All councils provided details to us via supplementary returns about who is responsible for assessing financial sustainability. The chief finance officer (or equivalent) is responsible for monitoring the council’s financial position and regularly reporting back to elected members, strategic leadership teams, and finance officers. But this is not always clearly reported within management commentaries (paragraph 61). There are increasing signs that sustained pressures have impacted the financial position of councils, and there are risks to financial sustainability in the medium term 84. Councils’ net revenue streams have generally increased in line with their net costs of services. Councils, however, have been making significant savings to reduce costs, and funding changes largely reflect increased baselining of funding into the GRG. Our analysis of 2024/25 accounts and related information suggests that, over a range of measures, the financial position of Scotland’s councils is worsening: • General funding has been increasing but more of it is directed, reducing the flexibility councils need to address cost pressures (paragraphs 11–12). • Councils have not generated other income at a rate that has kept pace with inflation (paragraphs 18–21). • Identifying recurring savings can become progressively more difficult over time and, while councils have largely been successful in delivering savings, many are reliant on non-recurring savings which do not address underlying issues (paragraph 31). • Usable reserves are now decreasing and, notably, uncommitted General Fund reserves are decreasing (Exhibit 8, page 25 and Exhibit 9, page 26). 85. At the same time, capital projects are becoming increasingly expensive. Councils have been borrowing more, and the financing of ongoing investment is increasingly expensive. External debt is increasing (paragraph 70) and a number of councils are spending more servicing their debt, across both their General Fund and services and HRA (paragraph 77). Projected borrowing as measured by the CFR is also increasing (paragraph 79). 86. Against this backdrop, councils again forecast significant budget gaps when setting their 2025/26 budgets, with further savings required to address them, alongside the continued planned use of reserves, despite ongoing transformation programmes. Without sustained and recurring financial pressures being addressed, across a range of indicators there are signs that councils will become financially unsustainable over the medium term, despite ongoing transformation and identification of efficiencies. Page 83 of 246
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2. Financial position and outlook 36 Upcoming work 87. How councils plan to use their reserves, make savings and transform their services needs to become more transparent as financial sustainability issues are addressed. In our next budget briefing, Local government budgets 2026/27, we will examine the decisions that Scotland’s councils take as they set their budgets (including setting council tax), the finalised funding settlement from the Scottish Government, decisions and the steps they intend to take to fund and transform their services. Page 84 of 246
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37Appendix Appendix Progress against the recommendations in Local government in Scotland: Financial bulletin 2023/24 In 2025, councils should: Progress/status Report on the savings made within their management commentaries more comprehensively, including provision of comparisons to savings targets agreed during budget-setting, and whether they were recurring or non-recurring. Limited progress • Councils are still not adequately reporting on the delivery of savings in their management commentaries, including whether savings are recurring or non-recurring (paragraph 35). • The report includes an updated recommendation on how councils must adequately report information on the delivery of savings within their management commentaries. Ensure that the impact of capital underspends, future borrowing projections and of using financial flexibilities on their indebtedness are reported clearly alongside the impact of these of future revenue budgets. Limited progress • Our review of council management commentaries found limited references to the impact of current financial decisions, such as capital underspends, new borrowing and utilising financial flexibilities, will have on future revenue budgets. • This report includes a recommendation on how councils should clearly explain within their management commentaries how future revenue budgets will be impacted by current financial decisions. Ensure reserve policies indicate explicitly and clearly the impact of financial flexibilities on reserves held; the nature, level of and intended timing of the deployment of committed usable reserves held; and the level of uncommitted and contingency funding held within General Funds. In progress • Most councils have a reserve policy which sets out the minimum level of reserves to be held, including those uncommitted. Five councils breached their minimum level for uncommitted reserves in 2024/25 (paragraphs 56–57). Cont. Page 85 of 246
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Appendix 38 In 2025, councils should: Progress/status Prioritise service transformation, considering the impact of current service delivery models on longer-term financial sustainability, including the medium-term impact on reserve levels. In progress • Most councils use their management commentaries to report on transformation activities, but the level of details varies. Not all councils hold committed reserves for transformation activities (paragraphs 68–69). • Councils need to continue to prioritise transformation activities to address financial challenges. • The report includes an updated recommendation for councils to clearly report on the level of committed reserves held for on transformation activities. Ensure that financial sustainability becomes a central focus of financial monitoring and reporting, making greater use of financial sustainability indicators within reports to elected members and within their regular public reporting and financial strategies and plans. In progress • Most councils regularly report financial sustainability indicators to elected members. There is discretion on how councils do this with not all councils fully using the LGBF financial sustainability indicators or CIPFA’s level of reserves indicators (paragraphs 80–83). • An updated recommendation on the use of financial indicators in monitoring and reporting is included in this report. Page 86 of 246
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Local government in Scotland Financial bulletin 2024/25 Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN Phone: 0131 625 1500 www.audit.scot ISBN 978 1 915839 99 2 Page 87 of 246
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Audit Committee Monday 23 February 2026 Item No 5.3 Treasury Management and Investment Strategy 2026/27 & Prudential Indicators Report by David Gladwin, Chief Finance Officer and Section 95 Officer Report for Decision 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 24 February 2026:- a) Approve the restriction of the Authorised Limit to the value of the Capital Financing Requirement at 31 March 2027 (£693.930 million); b) Note that there are no material changes proposed to the Treasury Management and Investment Strategy (TMIS) for 2026/27 from the strategy currently in place, other than to update the Prudential Indicators (Section 5 and Appendix 2), to reflect the revised capital plans; c) Note the continued use of the Asset Life method for the repayment of all loans fund advances as outlined in Section 6; and d) Accordingly approve the Treasury Management and Investment Strategy for 2026/27. 2 Purpose of Report/Executive Summary In accordance with the Treasury Management Code of Practice, the annual Treasury Management & Investment Strategy (TMIS) & Prudential Indicators report is required to be adequately scrutinised before being recommended to the Council. For Midlothian, this role is undertaken by the Audit Committee, with this report being presented to Audit Committee on 23 February 2026 prior to consideration by Council on 24 February 2026. The purpose of the report to Council will be to provide an update on the implementation of the Council’s TMIS 2025/26, and to make recommendations to facilitate consideration of the 2026/27 Strategy, specifically the TMIS for 2026/27, the Prudential and Treasury indicators contained therein, and the approach to the statutory repayment of loans fund advances. Page 89 of 246
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Any revisions arising from Audit Committee consideration of the report on 23 February 2026 will be verbally updated to Council before discussing the report on 24 February 2026. Date: 4 February 2026 Report Contact: Gary Thomson, Senior Finance Business Partner gary.thomson@midlothian.gov.uk 3. Update on implementation of TMIS for 2025/26 3.1 Borrowing The Council’s borrowing position as set out in the 2025/26 Treasury Management Mid-Year Review Report was £379.445 million at 31 March 2025, and six months later was £418.575 million on 30 September 2025. The principal source of borrowing is the UK Debt Management Office’s Public Works Loans Board (PWLB) and fixed rate loans are taken at a time and tenure which takes cognisance of the PWLB rates (derived from the UK Gilts market) and the management of maturity risk in the long term across the Council’s loan portfolio. The Council’s loan portfolio, as at 30 January 2026, is shown in table 1 below:- Table 1: Current Loan Portfolio as at 30 January 2026 Loan Type Principal Outstanding £000’s Weighted Average Rate PWLB Annuity 332 8.92% PWLB Maturity 340,283 3.12% PWLB EIP 67,542 4.24% LOBO 15,000 4.63% Market Loans 19,866 3.04% Total Loans 443,024 3.34% 3.2 Deposits The Council’s position for funds on deposit fluctuates on a daily basis, with the 2025/26 Treasury Management Mid-Year Review Report setting out the position at 31 March 2025 of £26.484 million and six months later on 30 September 2025, at £39.910 million. The position at 30 January 2026, as set out in Table 2 below, totals £30.372 million. Page 90 of 246
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Table 2: Current Deposits as at 30 January 2026 Deposit Type Principal Outstanding £000’s Weighted Average Rate Bank Call Accounts 683 3.51% Money Market Funds 19,689 3.88% Bank Fixed Term Deposits 10,000 4.18% Total Deposits 30,372 3.97% The Council’s current deposit portfolio is broadly reflective of the wider UK Local Authority position, as noted in the Treasury Management & Annual Investment Strategy Statement – 2026/27 Detailed in Appendix 3, Section 4.4. 4. Treasury Management & Investment Strategy 2026/27 4.1 Main Objectives of TMIS 2026/27 The objectives of the proposed TMIS are:- • To secure long-term borrowing to fund capital investment, through locking in to long-term interest rates and de-risking the Council’s Capital Financing Requirement (CFR); • To ensure short-term liquidity to manage the Council’s day-to- day cashflow. This is achieved through the utilisation of instant access Money Market Fund and Bank Accounts, with the amount held in these reflecting the Council’s level of working capital and fluctuating throughout the year due to a number of factors; • To partly (but not fully) cash-back the Council’s usable reserves (see Section 4.4 – Investment Strategy), to allow the Council to defer new borrowing until interest rates are expected to drop. In addition, approval is sought to restriction the Authorised Limit to the value of the Capital Financing Requirement at 31 March 2027 (£693.930 million) (see Section 5 – Prudential Indicators), There are no changes recommended to the Permitted Investments. More detail on the borrowing and investment strategy for 2026/27 is provided in Sections 4.2, 4.3 and 4.4 below. Page 91 of 246
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4.2 Borrowing Requirement 2025/26 to 2029/30 The Council’s capital plans contain projections of capital expenditure and income over the forthcoming financial years. Any expenditure not financed directly by income, requires funding through borrowing. The projected borrowing requirement arising from the Council’s Capital Plans and the maturing long-term loans that require to be refinanced, over the period 2025/26 to 2029/30 is shown in table 3 overleaf:- Page 92 of 246
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Table 3: Total Borrowing Requirement over the period 2025/26 to 2029/30 2025/26 £000’s 2026/27 £000’s 2027/28 £000’s 2028/29 £000’s 2029/30 £000’s Total £000’s Capital Expenditure General Services 59,004 107,038 132,248 101,566 34,436 434,292 HRA 59,999 88,419 69,783 47,355 48,724 314,280 Total Capital Expenditure 119,003 195,457 202,031 148,921 83,160 748,572 Total Available Financing -33,374 -38,710 -32,453 -32,156 -20,054 -156,747 Principal Debt Repayments -10,884 -12,018 -14,472 -16,734 -18,567 -72,675 Capital Expenditure less available Financing 74,745 144,729 155,106 100,031 44,539 519,150 Maturing Long-term Loans 16,424 19,425 19,690 39,697 29,697 124,933 Total Borrowing Requirement 91,169 164,153 174,796 139,728 74,236 644,083 Borrowing secured 2025/26 -80,000 0 0 0 0 -80,000 Total Remaining Borrowing Requirement 11,169 164,153 174,796 139,728 74,236 564,083 4.3 Borrowing Strategy for remainder of 2025/26 and 2026/27 Strategy for remainder of 2025/26 The approved Treasury Management Strategy for borrowing for the remainder of 2025/26 is to fund the in-year Capital Financing Requirements from PWLB for a relatively shorter-term duration (3-5 year debt tenors), to navigate past the current interest rate hump, with gilt yields expected to gradually ease throughout the course of the next 12-36 months. This strategy remains prudent given current & forecast interest rates. The Council’s external loan debt at 31 March 2026 is projected to be £458.024 million. Based on the Council’s historic and current approved Capital Plans, the Underlying Borrowing Requirement (UBR) – which is the Council’s underlying need to borrow for capital purposes (excluding the long-term liability arising from PFI/DBFM projects) – at 31 March 2026 is expected to equate to £549.201 million (see Appendix 2, Table 2.3). This means that the Council is expected to be £91.177 million (17%) under-borrowed at the end of the 2025/26 financial year i.e. the Council has funded the majority (83%) of its underlying borrowing requirement as at 31 March 2026. In the current economic climate, this is a prudent approach which balances (a) de-risking the longer term borrowing requirement at current longer term borrowing rates; against (b) the current year and forthcoming financial year budget projections; and is in line with the majority of other Scottish Local Authorities. Page 93 of 246
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Strategy for 2026/27 Looking forward, as can been noted from Table 3 above, the Council has a significant borrowing requirement across the forthcoming four financial years (2026/27 to 2029/30). The Underlying Borrowing Requirement, driven by the Council’s approved capital plans, is projected to rise to £993.606 million by 31 March 2030 (see Appendix 2, Section 2.3) – more than double the current external debt portfolio value of £443.024 million. The profile of this, and the projected external loan portfolio to fund the Underlying Borrowing Requirement over the period 2025/26 to 2029/30, is shown in graphical format below. Figure 1: Projected Loan Portfolio & Underlying Borrowing Requirement Interest Rates The current PWLB yield curve is bell shaped with the low point in the curve at the time of writing sitting at the shortest tenors (1-3 years @ c. 4.50%; certainty rate) with rates trending upwards towards the 25- 30 year tenor (high point of 6.03%; certainty rate) before easing back slightly to sit at c. 5.79% (certainty rate) in the 50 year duration. Current PWLB rates have generally increased by c. 20-30bps across the medium-longer end of the interest rate curve from levels reported at the time of the 2025/26 TMIS to Council in February 2025, and as noted in the TM Mid-Year Review Report to Council in December 2025, are expected to remain elevated for longer, particularly at the medium-longer end of the curve. The forward-looking Interest Rate Forecast from the Council’s Treasury Advisers, MUFG Corporate Markets, is shown in Table 4 below, with further commentary on this is provided in Appendix 3 Section 3.3 and Appendix 5.1. Page 94 of 246
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Table 4: MUFG Interest Rate Forecasts As can be noted in Table 4 above, 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. 30-40bps over the next 12 months, a further 10-20bps over the subsequent 12 months and a further 10bps in the medium/longer end over the following 12 months of the forecast period (so 50-60bps total). This is forecast to bring longer-term borrowing rates down from between 5.79%-6.03%, to between:- • 5.60%-5.80% by March 2026; • 5.30%-5.50% by March 2027; and • 5.10%-5.30% by March 2028. Borrowing Strategy 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. Given the Council’s borrowing requirement across 2025/26 to 2029/30 as outlined in Table 3, and the Interest Rate Forecasts as outlined in Table 4, consideration for any new borrowing, to fund the Council’s CFR, will seek to balance:- a) the security/certainty of current relatively high longer-term borrowing rates of upwards of 5.60% in the 30-50 year duration (which are forecast to drop by 30bps within one year and a total of 50bps 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 3 to 5 years (at say c. 3.80-4.20% at the HRA rate), to allow the Council to fund the immediate in- year borrowing requirement. Based on current interest rate forecasts (see Appendix 3 Section 3.3), this would then allow the Council the option to refinance this borrowing at initial 3-5 year maturity with less expensive, longer term borrowing, e.g. a 45 to 47 year tenor in, say, 36 months at a forecast rate of c. 4.60-4.80% (HRA Rate). Bank Rate 3.75% 3.50% 3.50% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3 month average earnings 3.80% 3.50% 3.50% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 6 month average earnings 3.80% 3.50% 3.50% 3.40% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 12 month average earnings 3.90% 3.60% 3.60% 3.50% 3.40% 3.50% 3.50% 3.50% 3.50% 3.50% 3.60% 3.60% 3.60% 5 year PWLB 4.60% 4.50% 4.30% 4.20% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 10 year PWLB 5.20% 5.00% 4.90% 4.80% 4.80% 4.70% 4.70% 4.70% 4.70% 4.60% 4.60% 4.60% 4.70% 25 year PWLB 5.80% 5.70% 5.60% 5.50% 5.50% 5.40% 5.30% 5.30% 5.30% 5.20% 5.20% 5.20% 5.20% 50 year PWLB 5.60% 5.50% 5.40% 5.30% 5.30% 5.20% 5.10% 5.10% 5.10% 5.00% 5.10% 5.00% 5.00% MUFG Corporate Markets Interest Rate View Mar-28 Jun-28 Sep-28 Dec-28 Mar-29Mar-26 Jun-26 Sep-26 Dec-26 Dec-27Sep-27Jun-27Mar-27 Page 95 of 246
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Any further long-term borrowing that is undertaken to finance the current & future year capital plans is expected to 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 to fund HRA capital expenditure, at a rate that is priced at Gilts+40bps, with an extension of the availability of this rate beyond 31 March 2026 (and so into financial year 2026/27) announced by the UK Government’s Ministry of Housing, Communities & Local Government (MHCLG) on 28 January 20261. Other market-led longer-term borrowing opportunities will be benchmarked against the prevailing PWLB rates to assess whether they offer value to the Council. Council officers, in conjunction with MUFG, 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. Forward Borrowing The opportunity also continues to exist to consider further loans on a ‘forward dealing’ basis, and officers will continue to explore the viability of these loans as part of securing the long term borrowing required to meet the Council’s Underlying Borrowing Requirement. Review of Capital Plans & Impact on Borrowing Strategy 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. 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 medium-long-term. Debt Rescheduling As noted in the Mid-Year Review Report, the Council elected to reschedule (prematurely repay) PWLB debt as follows:- • £12.700 million PWLB Maturity loan, original drawn date of 2 August 2007 and existing maturity date of 15 May 2053, at a fixed interest rate of 4.55% Any further 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. 1 Thousands more families to get warm, secure social homes - GOV.UK Page 96 of 246
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Council officers will explore debt rescheduling opportunities with MUFG Treasury Solutions; with only prudent and affordable debt rescheduling that considers both the short and medium-longer term impact being considered. 4.4 Investment Strategy for remainder of 2025/26 and 2026/27 No changes are proposed to the Investment Strategy from that approved by Council in the 2025/26 TMIS. As noted in Section 4.1, the Council is partly (but not fully) cash backing its usable reserves, instead using these balances to allow the deferral of borrowing at the current high interest rates payable, to allow the Council to most effectively navigate past the current interest rate plateau of the next 36 months, when rates on longer term borrowing are expected to drop by 50-60bps. All deposits will be placed with high creditworthy counterparties in accordance with the approved creditworthiness policy as outlined in Appendix 1, with a tenor reflective of the expected drawdown of useable reserve forecasts, and at a yield commensurate with this. Environmental, Social & Governance factors will also be considered; however as noted in previous Treasury Management Strategy reports the Governance element (and associated security of deposit) remains the primary criteria for Midlothian. For further detail see Appendix 3, Section 4. The list of Permitted Investments in Appendix 1 remains unchanged from that approved by Council in the 2025/26 TMIS. As required by the CIPFA Treasury Management Code, Local authorities “must not borrow to invest for the primary purpose of financial return.” Midlothian Council does not and has not borrowed to invest for the primary purpose of financial return. 5 Prudential Indicators – Midlothian Council The Prudential Code for Capital Finance in Local Authorities requires that Councils can demonstrate that their Capital Plans are affordable, prudent and sustainable, taking into account the financial provisions made in current and future revenue budgets; and that Treasury Management decisions are taken in accordance with good practice. The Prudential Indicators that Councils need to consider relate to both actual, historic outcomes, and future estimated outcomes (covering the same period as the Council’s Capital Plans), as follows:- • Actual outcomes for 2024/25; • Revised estimates of the 2025/26 indicators; and • Estimates of indicators for 2026/27 to 2029/30. Page 97 of 246
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The Prudential Indicators required by the Code are listed individually in Appendix 2. The key Prudential Indicators relating to the Underlying Borrowing Requirement, the expected Gross External Debt, and the proposed Authorised Limit, are shown in graphical format below. Figure 4: Prudential Indicators for Borrowing 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 long-term liability arising from the Council’s PPP/DBFM contracts. The Underlying Borrowing Requirement as shown in Figure 4 above strips out the latter of these (long-term liability arising from the Council’s PPP/DBFM contracts) from the CFR. The Authorised Limit for Borrowing represents the limit beyond which borrowing is prohibited, and needs to be set and revised by Members. It is the expected maximum borrowing need with some headroom for unexpected movements. The Authorised Limit for Borrowing for the 2026/27 financial year has been calculated to equate to the maximum value of the Underlying Borrowing Requirement in 2026/27. This equates to £693.930 million as outlined in Table 6 below. Table 6: Authorised Limit for Borrowing: Calculation Authorised Limit for Borrowing Amount £000’s CFR – General Services (31 March 2027) 296,175 CFR – HRA (31 March 2027) 397,755 Proposed Authorised Limit for Borrowing 693,930 Council is therefore asked to approve an authorised limit for borrowing of £693.930 million (see Appendix 2, Section 4.2). 458,024 611,479 775,282 876,652 922,002 £- £100,000 £200,000 £300,000 £400,000 £500,000 £600,000 £700,000 £800,000 £900,000 £1,000,000 2025/26 2026/27 2027/28 2028/29 2029/30 £000's Financial Year Prudential Indicators for Borrowing External Debt Authorised Limit Underlying Borrowing Requirement / Operational Boundary Page 98 of 246
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6 Statutory repayment of loans fund advances Under the Local Government Finance Circular 7/2016, Council is required to set out its policy for the statutory repayment of loans fund advances prior to the start of each financial year. The repayment of loans fund advances ensures that the Council makes a prudent provision each year to pay off an element of the accumulated loans fund advances made in previous financial years. 6.1 New Assets In accordance with Finance Circular 7/2016, for all advances made in relation to the provision of a new asset, the policy will be to defer the commencement of the first principal repayment of the loans fund advance until the financial year following the one in which the asset is first available for use. 6.2 Prudent Repayment of Loans Fund Advances Finance Circular 7/2016 provides a variety of options to Councils for the profiling of the repayment of each loans fund advance, so long as the principle of prudence is maintained. For the 2026/27 financial year, there are 3 options available: (a) Asset Life method; (b) Depreciation method; and (c) Funding/income profile method. In line with the policy adopted in 2025/26, the Asset Life method shall be used for those assets in Table 7. Table 7: Asset Classes adopting the “Asset Life” method Infrastructure Current Loans Fund Advance Period New Primary Schools/Extensions 60 New Leisure Centres 60 New Offices 60 Road Upgrades 50 Street Lighting Columns 50 Structures/Bridges 50 Footway/Cyclepaths 50 Town Centre Environmental Improvements 50 New Care Homes 45 Children’s Play Equipment 20 The annual repayments under the “Asset Life” method for those asset classes as noted above will be calculated using the asset lives and will use the annuity method, in line with previous years. The annuity interest rate that will be used to calculate loans fund principal repayments under the “Asset Life” method will be the in-year loans fund rate, which for 2026/27 is currently estimated to be 2.97%. For all other asset classes, the policy will also be to profile the annual repayments under the “Asset Life” method, with the profile also Page 99 of 246
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calculated using the annuity method. The annuity interest rate that will be used to calculate loans fund principal repayments under the “Asset Life” method will be the in-year loans fund rate, which for 2026/27 is currently estimated to be 2.97%. Whilst neither the Depreciation nor the Funding/income profile methods are currently proposed, Council officers will continue to monitor whether it is appropriate to use this for future capital projects. 7. Report Implications 7.1 Resource There are no direct resource implications arising from this report. 7.2 Digital None 7.3 Risk The strategies outlined in this report are designed to maintain the effectiveness of the overall risk management arrangements for Treasury activity. Providing the limits outlined in the strategies are observed they will support the controls already in place in the Treasury Management Practices within which the treasury function operates. The Prudential Indicators contained in Appendix 2 maintain the effectiveness of the overall risk management of Capital Investment and Treasury Management. 7.4 Ensuring Equalities There are no equality issues arising from this report. 7.5 Additional Report Implications See Appendix A. Page 100 of 246
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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 MUFG Asset Services, the Council’s appointed Treasury Consultants. A.6 Impact on Performance and Outcomes The strategies to be 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. Background Papers:- Appendix 1:- Permitted Investments Appendix 2:- Prudential Indicators Appendix 3:- Treasury Management & Annual Investment Strategy Statement – 2026/27 Detailed Page 101 of 246
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Permitted Investments Appendix 1 The Council uses the MUFG creditworthiness service for specific categories of permitted investments. This utilises credit ratings from the three main credit rating agencies – Fitch, Moody’s and Standard & Poors, along with credit watches, outlooks, CDS spreads and country sovereign ratings in a weighted scoring system with an end product of a series of colour coded bands which indicate the relative creditworthiness of specific categories of counterparties for investment. These colour codes are used by the Council to determine the maximum suggested duration for investment with that counterparty. These are as follows:- MUFG Colour Code Maximum Suggested Duration for Investment Yellow 6 years* Dark Pink 6 years** Light Pink 6 years** Purple 2.5 years Blue 1.25 years*** Orange 1.25 years Red 7 months Green 120 days No colour Not to be used * Note the yellow colour category is for:- UK Government Debt, or its equivalent, Money Market Funds (MMF's), and collateralised deposits where the collateral is UK Government Debt ** Dark Pink for Ultra Short Dated Bond Funds with a credit score of 1.25; Light Pink for Ultra Short Dated Bond Funds with a credit score of 1.5 *** Only applies to nationalised or semi-nationalised UK banks Note that the maximum suggested durations listed above have been extended by 1 year (when compared to the suggested maximum durations provided by MUFG) for the Yellow, Dark Pink, Light Pink categories (and so to 6 years); the Purple category by 6 months to 2.5 years; the Blue and Orange categories by 3 months to 1.25 years; the Red category by a month to 7 months, and the Green category by 20 days to 120 days. This is to allow flexibility around these durations on the margins e.g. the placement of a 13 month fixed term deposit for a counterparty rated Orange or Blue. A thorough appraisal of the additional risk involved in extending the duration of any deposit (marginally) beyond the maximum suggested by MUFG, against any enhanced value to the portfolio, will be undertaken prior to the placement of any deposit. Page 103 of 246
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1.1 Deposits Investment Category Minimum Credit Criteria Liquidity risk Market risk Max %/£m of total investments Max. maturity period Debt Management Agency Deposit Facility -- Term No 100% 6 months Term deposits – local authorities -- Term No 100% 5 years Call accounts – banks and building societies Green Instant No 100% 1 day Term deposits / Notice Accounts – banks and building societies Yellow Purple Blue Orange Red Green No Colour Term No 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use Fixed term deposits with variable rate and variable maturities: - Structured deposits Yellow Purple Blue Orange Red Green No Colour Term No 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use 1.2 Deposits with counterparties currently in receipt of government support / ownership Investment Category Minimum Credit Criteria Liquidity risk Market risk Max %/£m of total investments Max. maturity period UK nationalised banks – Call accounts Blue Instant No 100% 1 day UK nationalised banks – Term Deposits / Notice Accounts Blue Term No 100% 1.25 years UK nationalised banks – Fixed term deposits with variable rate and variable maturities: - Structured deposits Blue Term No 100% 1.25 years Non-UK(high sovereign rated country) nationalised banks – Call accounts Green Instant No 100% 1 day Non-UK (high sovereign rated country) nationalised banks:- Term Deposits / Notice Accounts Yellow Purple Blue Orange Red Green No Colour Term No 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use Non-UK (high sovereign rated country) nationalised banks:- Fixed term deposits with variable rate and variable maturities: - Structured deposits Yellow Purple Blue Orange Red Green No Colour Term No 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use If forward deposits are made, the forward period plus the deal period equate to the maximum maturity period. Page 104 of 246
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1.3 Collective investment schemes structured as Open Ended Investment Companies (OEICs) Investment Category Minimum Credit Criteria Liquidity risk Market risk Max %/£m of total investments Max. maturity period Government Liquidity Funds AAA Instant No 100% 1 day Money Market Funds CNAV AAA Instant No 100% 1 day Money Market Funds LVNAV AAA Instant No 100% 1 day Money Market Funds VNAV AAA Instant No 100% 1 day Ultra Short Dated Bond Funds with a credit score of 1.25 AAA T+1 to T+5 Yes 100% 1 week Ultra Short Dated Bond Funds with a credit score of 1.5 AAA T+1 to T+5 Yes 100% 1 week Bond Funds AAA T+2 or longer Yes 50% 2 days Gilt Funds AAA T+2 or longer Yes 50% 2 days 1.4 Securities issued or guaranteed by governments Investment Category * Minimum Credit Criteria Liquidity risk Market risk Max %?£m of total investments Max. maturity period Treasury Bills UK sovereign rating Sale T+1 Yes 100% 50 years UK Government Gilts UK sovereign rating Sale T+1 Yes 100% 50 years Bond issuance issued by a financial institution which is explicitly guaranteed by the UK Government e.g. National Rail UK sovereign rating Sale T+3 Yes 100% 50 years Sovereign bond issues (other than the UK govt) AAA (or state your criteria if different) Sale T+1 Yes 100% 50 years Bonds issued by multilateral development banks AAA (or state your criteria if different) Sale T+1 Yes 100% 50 years Page 105 of 246
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1.5 Securities issued by corporate organisations Investment Category * Minimum Credit Criteria Liquidity risk Market risk Max % of total investments Max. maturity period Certificates of deposit issued by banks and building societies Yellow Purple Blue Orange Red Green No Colour Sale T+0 Yes 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use Commercial paper other Yellow Purple Blue Orange Red Green No Colour Sale T+0 Yes 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use Floating rate notes Yellow Purple Blue Orange Red Green No Colour Sale T+2 Yes 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use Corporate Bonds other Yellow Purple Blue Orange Red Green No Colour Sale T+2 Yes 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use 1.6 Other Investment Category Minimum Credit Criteria Liquidity risk Market risk Max %/£m of total investments Max. maturity period Local authority mortgage guarantee scheme. Blue Term No 50% 5 years Loans to Third Parties n/a Term No £25m 25 years Subordinated Debt Subscription to Newbattle Centre SPV n/a Term No £0.326m 22 years Midlothian Energy Limited n/a Term No £10.2m n/a Treasury Risks and Mitigating Controls for each type of investment are as outlined in the Treasury Management & Annual Investment Strategy Statement – 2023/24 Detailed – Appendix 5.3. The Council’s Treasury Management Practices have also been updated in line with the new CIPFA Prudential and Treasury Management Codes which were approved by Audit Committee on 6 December 2022. Page 106 of 246
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Prudential Indicators Appendix 2 1. Prudential Indicators for Affordability These indicators provide an indication of the impact of the capital investment plans on the Council’s overall finances. 1.1 Estimates of Ratio of Financing Costs to Net Revenue Stream This indicator identifies the trend in the cost of capital (borrowing and other long term obligation costs net of investment income) against the net revenue stream. The figures above are based on the current General Services and HRA Capital Plans. 1.2 HRA Ratios The following indicator identifies the ratio of overall debt on the HRA account compared to annual house rent revenue. The following indicator identifies the ratio of overall debt on the HRA account per HRA dwelling. 1.3 Net Income from Service & Commercial Investments as a proportion of Net Revenue Stream An indicator, which is a requirement of the new Prudential Code, identifies the ratio of net income from service and commercial investments as a proportion of the net General Services revenue stream. 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate General Services 1.41% 1.81% 2.66% 3.89% 5.20% 6.01% HRA 42.69% 47.04% 51.43% 57.16% 58.14% 58.28% Ratio of Financing Costs to Net Revenue Stream 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate HRA debt £000's 283,242£ 325,235£ 397,755£ 442,630£ 466,732£ 496,802£ HRA Revenues £000's 36,382 37,917 41,300 44,818 48,384 51,321 Ratio of HRA Debt to Revenues % 779% 858% 963% 988% 965% 968% HRA Debt as a % of Gross Revenue 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate HRA debt £000's 283,242£ 325,235£ 397,755£ 442,630£ 466,732£ 496,802£ Number of HRA dwellings 7,448 7,654 7,951 8,165 8,333 8,432 Debt per dwelling £ 38,029£ 42,492£ 50,026£ 54,211£ 56,010£ 58,919£ HRA Debt per Dwelling Page 107 of 246
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2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual £000's Estimate £000's Estimate £000's Estimate £000's Estimate £000's Estimate £000's Income from Service Investments 34 34 34 34 34 34 Net Revenue Stream 294,134 317,181 327,812 334,347 341,038 347,891 % 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Net Income from Service Investments as a proportion of Net Revenue Stream % Page 108 of 246
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2. Prudential Indicators for Capital Expenditure The Council’s capital expenditure plans are the key driver of treasury management activity. The output of the capital expenditure plans is reflected in the prudential indicators, which are designed to assist members’ overview and confirm capital expenditure plans. 2.1 Estimated Capital Expenditure This indicator shows the gross capital spend included in the relevant capital plans. 2.2 Financing of Capital Expenditure This indicator shows how the Capital Expenditure forecasts are being financed by capital or revenue resources. Any shortfall of resources results in a funding borrowing need. 2.3 Estimated Capital Financing Requirement This indicator measures the Council’s maximum underlying need to borrow for capital purposes and other long term liabilities over the next three years. 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's General Services Children, Young People & Estates 17,218£ 21,977£ 71,726£ 106,520£ 84,850£ 18,590£ Asset Management 13,334£ 18,593£ 19,262£ 17,066£ 14,250£ 14,811£ Transport, Energy & Infrastructure 2,346£ 5,821£ 8,654£ 2,233£ 428£ 428£ Regeneration & Development 15,078£ 13,343£ 8,604£ 8,963£ 5,232£ 3,050£ Other 1,058£ 465£ 297£ 180£ 180£ 180£ Provision for return of contingencies -£ (1,194)£ (1,505)£ (2,714)£ (3,374)£ (2,624)£ Total General Services 49,034£ 59,004£ 107,038£ 132,248£ 101,566£ 34,436£ Total HRA 53,174£ 59,999£ 88,419£ 69,783£ 47,355£ 48,724£ Combined Total 102,208£ 119,003£ 195,457£ 202,031£ 148,921£ 83,160£ Capital Expenditure 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's Capital Expenditure General Services 49,034£ 59,004£ 107,038£ 132,248£ 101,566£ 34,436£ HRA 53,174£ 59,999£ 88,419£ 69,783£ 47,355£ 48,724£ Total 102,208£ 119,003£ 195,457£ 202,031£ 148,921£ 83,160£ Financed by: Capital receipts 175£ -£ -£ -£ -£ -£ Capital grants 25,191£ 27,390£ 24,588£ 25,307£ 19,833£ 14,869£ Capital reserves -£ -£ -£ -£ -£ -£ Developer/Other Contributions 3,218£ 5,984£ 14,122£ 7,146£ 12,323£ 5,185£ Net financing need for the year 73,624£ 85,629£ 156,747£ 169,578£ 116,765£ 63,106£ Capital Expenditure and Available Financing Page 109 of 246
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3. Prudential Indicators for Prudence 3.1 Net Borrowing Requirement This indicator shows the amount of external borrowing required to finance the current debt outstanding on capital projects. 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's Capital Financing Requirement CFR – General Services 186,624£ 223,966£ 296,175£ 406,407£ 482,336£ 496,804£ CFR – HRA 283,242£ 325,235£ 397,755£ 442,630£ 466,732£ 496,802£ CFR – PFI Schemes 84,815£ 80,661£ 76,277£ 71,663£ 66,819£ 61,745£ Total CFR 554,681£ 629,862£ 770,207£ 920,700£ 1,015,887£ 1,055,351£ Movement in CFR 64,796£ 75,181£ 140,345£ 150,492£ 95,187£ 39,465£ Movement in CFR represented by Net financing need for the year (previous table) 73,624£ 85,629£ 156,747£ 169,578£ 116,765£ 63,106£ MEL Shareholder Injection 4,590£ -£ -£ -£ -£ -£ Less Scheduled Debt Amortisation (9,494)£ (10,884)£ (12,018)£ (14,472)£ (16,734)£ (18,567)£ Less net PFI Finance Lease Principal Payments (3,924)£ (4,154)£ (4,384)£ (4,614)£ (4,844)£ (5,074)£ Movement in CFR 64,796£ 70,591£ 140,345£ 150,492£ 95,187£ 39,465£ Capital Financing Requirement (CFR) 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's External Debt Debt at 1 April 340,871£ 379,445£ 458,024£ 611,479£ 775,282£ 876,652£ Actual/Expected change in Debt 38,574£ 78,579£ 153,456£ 163,802£ 101,370£ 45,351£ Other long-term liabilities (OLTL) at 1 April 88,739£ 84,815£ 80,661£ 76,277£ 71,663£ 66,819£ Actual/Expected change in OLTL (3,924)£ (4,154)£ (4,384)£ (4,614)£ (4,844)£ (5,074)£ Actual/Expected Gross Debt at 31 March 464,260£ 538,685£ 687,756£ 846,945£ 943,471£ 983,747£ The Capital Financing Requirement 554,681£ 629,862£ 770,207£ 920,700£ 1,015,887£ 1,055,351£ Under / (over) borrowing 90,421£ 91,178£ 82,451£ 73,755£ 72,416£ 71,604£ Deposits Cash & Cash Equivalents 20,000£ 20,000£ 20,000£ 20,000£ 20,000£ 20,000£ Short-Term Investments 10,000£ -£ -£ -£ -£ -£ Total Deposits 30,000£ 20,000£ 20,000£ 20,000£ 20,000£ 20,000£ Net Borrowing Requirement Page 110 of 246
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4. Prudential Indicators for External Debt 4.1 Operational Boundary This is the limit beyond which external debt is not normally expected to exceed and will be the focus of day to day treasury management. Typically, this would be a similar figure to the CFR, but may be lower or higher depending on the levels of actual debt. For this Council:- • the Operational Boundary for Borrowing has been calculated to equate directly to the value of the CFR for General Services and HRA combined, over the current financial year and the following 4 financial years (2025/26 to 2029/30); and • the Operational Boundary for Other Long-Term Liabilities has been calculated to equate directly to the in-year CFR for Other Long-Term Liabilities, given the known contractual provisions for the repayment of debt within the Council’s two PPP agreements. Should the Operational Boundary be breached, for example as a result of a decision taken to borrow in advance (should market conditions indicate that it is prudent to do so), this will be reported to Council at the next available opportunity. 4.2 Authorised Limit of Total External Debt This indicator sets the limit for total external debt. The Authorised Limit for Borrowing for the 2026/27 financial year has been calculated to equate to the maximum value of the Underlying Borrowing Requirement in 2026/27. This equates to £693.930 million as outlined below. 2025/26 2026/27 2027/28 2028/29 2029/30 Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's Operational Boundary - Borrowing 549,201£ 693,930£ 849,037£ 949,068£ 993,606£ Operational Boundary - Other long term liabilities 80,661£ 76,277£ 71,663£ 66,819£ 61,745£ Total 629,862£ 770,207£ 920,700£ 1,015,887£ 1,055,351£ Operational Boundary £000's CFR - General Services at 31 March 2027 296,175£ CFR - HRA at 31 March 2027 397,755£ Authorised Limit for Borrowing 693,930£ Authorised Limit for Borrowing Page 111 of 246
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5. Prudential Indicators for Treasury Management 5.1 Upper limits on Fixed and Variable Interest Rates This indicator limits the amount of external debt that may be held at fixed or variable rates. These limits are proposed to be as follows:- 5.2 Maturity Structure of Borrowing This indicator sets the upper and lower limits of the time scales within which external debt may be held. The Treasury Management Code of Practice requires that LOBO’s with a call date in the next 12 months are classified as short-term borrowing rather than longer-term (10 year+) borrowing. In addition, the Code also recommends that where an authority’s debt is typically very long term (i.e. for a period of greater than 10 years), that authorities should break down the period in excess of 10 years into several ranges, for example 10 to 20 years, 20 to 30 years, etc. With the above in mind, the proposed upper and lower limits for each maturity band are shown below, with the overall aim to ensure a spreading approach to avoid a cluster of high value loans maturing/requiring refinancing within a short period of time. Limits on fixed interest rates based on gross debt 100.00% Limits on variable interest rates based on gross debt 30.00% Limits on fixed interest rates based on investments 100.00% Limits on variable interest rates based on investments 100.00% Upper Limits on Exposure to Fixed and Variable Interest Rates 2026/27 Interest rate exposures Upper Limit Page 112 of 246
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5.4 Total Principal Sums Invested for Periods Longer than 365 Days This indicator relates to the total level of investments held for periods longer than 365 days. The current strategy as outlined in the body of these reports is to continue to cash-back the Council’s balance sheet reserves. It is expected that the majority of this will be in the form of fixed term deposits and/or certificates of deposit. Given expected reserve forecasts and the current interest rate environment, in particular the short-medium term forecast for the Council’s Capital Fund and HRA Reserve, the limit for prinicipal sums invested for > 365 days has been retained at £70m. For its cash flow generated balances, the Council will seek to utilise its business reserve instant access accounts and money market funds. 5.5 Liability Benchmark The “Liability Benchmark” identifies future borrowing needs across the short, medium and longer terms, against the maturity profile of the Council’s existing loan portfolio. The Council’s Liability Benchmark in graphical format is as shown below. Maturity structure of fixed interest rate borrowing 2026/27 Lower Upper 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% Maturity structure of variable interest rate borrowing 2026/27 Lower Upper 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 30 years to 40 years Under 12 months 12 months to 2 years 50 years and above 40 years to 50 years Maturity Structure of Borrowing 2026/27 5 years to 10 years 10 years to 20 years 20 years to 30 years 30 years to 40 years 40 years to 50 years 50 years and above Under 12 months 12 months to 2 years 2 years to 5 years 2 years to 5 years 5 years to 10 years 10 years to 20 years 20 years to 30 years Limit £70m Principal Sums Invested for > 365 Days Page 113 of 246
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There are four components to the Liability Benchmark: - 1 Existing loan debt outstanding: the Council’s existing loans that are still outstanding in future years – shown as the stacked bar elements of the figure above. 2 Loans CFR: this is calculated in accordance with the loans CFR definition in the Prudential Code and projected into the future based on approved prudential borrowing and planned Loans Fund advances/Loans Fund principal repayments. 3 Net loans requirement: this shows the Council’s gross loan debt less treasury management investments at the last financial year-end, projected into the future and based on its approved prudential borrowing, planned Loans Fund principal repayments and any other major cash flows (drawdowns/enhancement of reserves) forecast. 4 Liability benchmark (or gross loans requirement): this equals net loans requirement plus short-term liquidity/working capital allowance. The Liability Benchmark Indicator identifies the Council’s expected future capital financing requirement, as driven by the Council’s approved Capital Plans – and therefore the Council’s future borrowing needs; along with how this matches to the existing debt maturity profile. It is therefore a key tool to support the financing risk management of the capital financing requirement. As can be noted from the figure above, the Council has a significant borrowing requirement (which equates to £564.083 million) in the short-medium term, arising as a direct result of the Council’s approved Capital Plans. The proposed approach to securing this borrowing need for the 2026/27 financial year is outlined in the main body of this report, Section 4.3. The Liability Benchmark also outlines the profile of the Council’s CFR over the medium-long term, against the Council’s existing debt portfolio maturity profile. As can be seen from the figure above, the profile of the CFR movements in the medium-long term broadly matches the movements in the Councils external debt portfolio over this period. £0 £200,000 £400,000 £600,000 £800,000 £1,000,000 £1,200,000 Total Am ount (£'000) Liability Benchmark PWLB Loans Market Loans (excl LOBO loans) LOBO Loans Existing Loan Debt Outstanding Net Loans Requirement (forecast net loan debt) Loans CFR Liability Benchmark (Gross Loans Requirement) Page 114 of 246
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The Debt Liability Benchmark will assist the Council with plotting the tenor of borrowing to finance the Council’s approved capital plans that is undertaken in the remainder of 2025/26 and the forthcoming 2026/27 period, to ensure that this aligns with the Council’s future expected CFR profile and Liability Benchmark projections, taking into account the profile of existing loan maturities as identified in the figure above. Page 115 of 246
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Appendix 3 Treasury Management Strategy Statement and Annual Investment Strategy Midlothian Council 2026/27 Page 117 of 246
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INDEX 1 INTRODUCTION ............................................................................................................................ 3 1.1 Background ............................................................................................................................................... 3 1.2 Reporting requirements ............................................................................................................................ 3 1.3 Treasury Management Strategy for 2026/27 ........................................................................................... 5 1.4 Training ...................................................................................................................................................... 5 1.5 Treasury management consultants .......................................................................................................... 6 2 THE CAPITAL PRUDENTIAL INDICATORS 2026/27 – 2029/30 ............................................. 7 2.1 Capital expenditure ................................................................................................................................... 7 2.2 The Council’s borrowing need (the Capital Financing Requirement) ...................................................... 8 3 Borrowing .................................................................................................................................... 11 3.1 Current portfolio position ......................................................................................................................... 11 3.2 Treasury Indicators: limits to borrowing activity ...................................................................................... 13 3.3 Prospects for interest rates ..................................................................................................................... 14 3.4 Borrowing strategy .................................................................................................................................. 16 3.5 Policy on borrowing in advance of need ................................................................................................. 19 3.6 Debt rescheduling ................................................................................................................................... 19 4 ANNUAL INVESTMENT STRATEGY ........................................................................................ 19 4.1 Investment policy ..................................................................................................................................... 20 4.2 Creditworthiness policy ........................................................................................................................... 22 4.3 Country and sector limits ......................................................................................................................... 23 4.4 Investment strategy ................................................................................................................................. 24 4.5 Investment risk benchmarking ................................................................................................................ 26 4.6 End of year investment report ................................................................................................................. 26 5 Appendices .................................................................................................................................. 27 5.1 APPENDIX: Economic Background ....................................................................................................... 28 5.2 APPENDIX: Treasury Management Practice (TMP1): Permitted Investments .................................... 28 5.3 APPENDIX: Treasury Management Practice (TMP1) – Credit and Counterparty Risk Management 41 5.4 APPENDIX: Approved countries for investments .................................................................................. 47 5.5 APPENDIX: Treasury management scheme of delegation .................................................................. 48 5.6 APPENDIX: The treasury management role of the section 95 officer .................................................. 49 Page 118 of 246
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3 1 INTRODUCTION 1.1 Background The main function of the treasury management service is the funding of the Council’s capital plans. These capital plans provide a guide to the borrowing need of the Council, essentially the longer term cash flow planning to ensure that the Council can meet its capital spending obligations. This management of longer term cash may involve arranging long or short term loans, or using longer term cash flow surpluses. On occasion any debt previously drawn may be restructured to meet Council risk or cost objectives. The Council is required to operate a balanced budget, which broadly means that cash raised during the year will meet cash expenditure. As such, the second part of the treasury management operation is to ensure that this cash flow is adequately planned, with cash being available when it is needed. Surplus monies are deposited with low risk counterparties or instruments commensurate with the Council’s low risk appetite, providing adequate liquidity initially before considering investment return. The contribution the treasury management function makes to the authority is critical, as the balance of debt and investment operations ensure liquidity or the ability to meet spending commitments as they fall due, either on day-to-day revenue or for larger capital projects. The treasury operations will see a balance of the interest costs of debt and the investment income arising from cash deposits affecting the available budget. Since cash balances generally result from reserves and balances, it is paramount to ensure adequate security of the sums invested, as a loss of principal will in effect result in a loss to the General Fund Balance. Whilst any loans to third parties, commercial investment initiatives or other non-financial investments will impact on the treasury function, these activities are generally classed as non-treasury activities, (arising usually from capital expenditure),and are separate from the day to day treasury management activities. CIPFA defines treasury management 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.” Whilst any commercial initiatives or loans to third parties will impact on the treasury function, these activities are generally classed as non-treasury activities, (arising usually from capital expenditure), and are separate from the day-to-day treasury management activities 1.2 Reporting requirements 1.2.1 Capital Strategy The CIPFA Prudential and Treasury Management Codes require all local authorities to prepare an additional report, a capital strategy report, which provides the following: • a high-level long term overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of services • an overview of how the associated risk is managed • the implications for future financial sustainability Page 119 of 246
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4 The aim of the capital strategy is to ensure that all elected members on the full council fully understand the overall long-term policy objectives and resulting capital strategy requirements, governance procedures and risk appetite. 1.2.2 Treasury Management Reporting The Council is required to receive and approve, as a minimum, three main reports each year, which incorporate a variety of polices, estimates and actuals. a) Prudential and treasury indicators and treasury strategy (this report) - The first, and most important report covers: • the capital plans (including prudential indicators) for 2025/26 to 2029/30; • a policy for the statutory repayment of debt, (how residual capital expenditure is charged to revenue over time); • the treasury management strategy (how the investments and borrowings are to be organised) for 2026/27, including treasury indicators; and • a permitted investment strategy for 2026/27 (the parameters on how investments are to be managed). b) A mid year treasury management report – This will update members with the progress of the capital position, amending prudential indicators as necessary, and whether the actual treasury strategy is meeting the strategy outlined in advance of the year, or whether any policies require revision. c) An annual treasury outturn report – This provides details of a selection of actual prudential and treasury indicators for the previous financial year and actual treasury operations compared to the estimates within the strategy. Scrutiny The above reports are required to be adequately scrutinised before being recommended to the Council. This role is undertaken by the Audit Committee with this report being presented to Audit Committee prior to consideration by Council. Any revisions arising from Audit Committee consideration of the report on 23 February 2026 will be verbally updated to Council before discussing the report on 24 February 2026. Page 120 of 246
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5 1.3 Treasury Management Strategy for 2026/27 The strategy for 2026/27 covers two main areas: Capital issues • the capital expenditure plans and the prudential indicators (Section 2 of this report); • The policy for the statutory repayment of loans fund advance (Section 2.4 of this report). Treasury management issues • policy on use of external service providers (Section 1.5); • the current treasury position (Section 3.1); • treasury indicators which limit the treasury risk and activities of the Council (Section 3.2); • prospects for interest rates (Section 3.3); • the borrowing strategy (Section 3.4); • policy on borrowing in advance of need (Section 3.5); • debt rescheduling (Section 3.6); • the investment strategy (Section 4.1); and • creditworthiness policy (Section 4.2). These elements cover the requirements of the Local Government in Scotland Act 2003, the CIPFA Prudential Code, the CIPFA Treasury Management Code and The Scottish Government Local Authority (Capital Finance & Accounting) (Scotland) Regulations 2016. 1.4 Training The CIPFA Code requires the responsible officer to ensure that members with responsibility for treasury management receive adequate training in treasury management. This especially applies to members responsibe for scrutiny. Furthermore, pages 47 and 48 of the Code state that they expect “all organisations to have a formal and comprehensive knowledge and skills or training policy for the effective acquisition and retention of treasury management knowledge and skills for those responsible for management, delivery, governance and decision making. Organisations need to consider how to assess whether treasury management staff and board/ council members have the required knowledge and skills to undertake their roles and whether they have been able to maintain those skills and keep them up to date. As a minimum, authorities should carry out the following to monitor and review knowledge and skills: • Record attendance at training. • Prepare tailored learning plans for treasury management officers and board/council members. • Require treasury management officers and board/council members to undertake self-assessment against the required competencies. • Have regular communication with officers and board/council members, encouraging them to highlight training needs on an ongoing basis.” In further support of the revised training requirements, CIPFA’s Better Governance Forum and Treasury Management Network have produced a ‘self-assessment by members responsible for the scrutiny of treasury management’, which is available from the CIPFA Page 121 of 246
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6 website to download. This was presented to members of the Audit Committee and Council as part of the Council’s Treasury Management 2021-22 Mid-Year Review Report. A formal record of Knowledge & Skills Schedule has been developed as part of the Council’s Treasury Management Practices. This will be periodically reviewed to assess suitability, and updated to reflect ongoing training, knowledge and skills gained. Similarly, a formal record of the treasury management/capital finance training received by members will also be periodically reviewed and updated. 1.5 Treasury management consultants The Council uses MUFG Corporate Markets (former Link, Treasury Solutions Limited) as its external treasury management advisors. The Council recognises that responsibility for treasury management decisions remains with the organisation at all times and will ensure that undue reliance is not placed upon our external service providers. All decisions will be undertaken with regards to all available information, including, but not solely, our treasury advisers. It also recognises that there is value in employing external providers of treasury management services in order to acquire access to specialist skills and resources. The Council will ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed and documented, and subjected to regular review. Page 122 of 246
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7 2 THE CAPITAL PRUDENTIAL INDICATORS 2025/26 – 2029/30 The Council’s capital expenditure plans are the key driver of treasury management activity. The output of the capital expenditure plans is reflected in the prudential indicators, which are designed to assist members’ overview and confirm capital expenditure plans. 2.1 Capital expenditure This prudential indicator is a summary of the Council’s capital expenditure plans, both those agreed previously, and those forming part of this budget cycle. The table below summarises the Capital Expenditure forecasts:- The table below shows how the Capital Expenditure forecasts are being financed by capital or revenue resources. Any shortfall of resources results in a funding borrowing need. Members are asked to approve the capital expenditure forecasts and the financing of these forecasts:- Note: The above financing need excludes other long term liabilities, such as PFI and leasing arrangements which already include borrowing instruments. 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's General Services Children, Young People & Estates 17,218£ 21,977£ 71,726£ 106,520£ 84,850£ 18,590£ Asset Management 13,334£ 18,593£ 19,262£ 17,066£ 14,250£ 14,811£ Transport, Energy & Infrastructure 2,346£ 5,821£ 8,654£ 2,233£ 428£ 428£ Regeneration & Development 15,078£ 13,343£ 8,604£ 8,963£ 5,232£ 3,050£ Other 1,058£ 465£ 297£ 180£ 180£ 180£ Provision for return of contingencies -£ (1,194)£ (1,505)£ (2,714)£ (3,374)£ (2,624)£ Total General Services 49,034£ 59,004£ 107,038£ 132,248£ 101,566£ 34,436£ Total HRA 53,174£ 59,999£ 88,419£ 69,783£ 47,355£ 48,724£ Combined Total 102,208£ 119,003£ 195,457£ 202,031£ 148,921£ 83,160£ Table 1: Capital Expenditure 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's Capital Expenditure General Services 49,034£ 59,004£ 107,038£ 132,248£ 101,566£ 34,436£ HRA 53,174£ 59,999£ 88,419£ 69,783£ 47,355£ 48,724£ Total 102,208£ 119,003£ 195,457£ 202,031£ 148,921£ 83,160£ Financed by: Capital receipts 175£ -£ -£ -£ -£ -£ Capital grants 25,191£ 27,390£ 24,588£ 25,307£ 19,833£ 14,869£ Capital reserves -£ -£ -£ -£ -£ -£ Developer/Other Contributions 3,218£ 5,984£ 14,122£ 7,146£ 12,323£ 5,185£ Net financing need for the year 73,624£ 85,629£ 156,747£ 169,578£ 116,765£ 63,106£ Table 2: Capital Expenditure and Available Financing Page 123 of 246
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8 2.2 The Council’s borrowing need (the Capital Financing Requirement) The second prudential indicator is the Council’s Capital Financing Requirement (CFR). The CFR is simply the total historic outstanding capital expenditure which has not yet been paid for from either revenue or capital resources. It is essentially a measure of the Council’s underlying borrowing need. Any capital expenditure above, which has not immediately been paid for (financed), will increase the CFR. The CFR does not increase indefinitely, as annual repayments from revenue need to be made which reflect the useful life of capital assets financed from borrowing. From 1st April 2016, Local Authorities may choose whether to use scheduled debt amortisation (loans pool charges) or another suitable method of calculation in order to repay borrowing. The CFR includes any other long term liabilities (e.g. PFI schemes, finance leases). Whilst these increase the CFR, and therefore the Council’s borrowing requirement, these types of scheme already include a borrowing facility and so the Council is not required to separately borrow for these schemes. The Council currently has £88.739m of such schemes within the CFR. The Council is asked to approve the CFR projections below: A key aspect of the regulatory and professional guidance is that elected members are aware of the size and scope of any commercial activity in relation to the authority’s overall financial position. The capital expenditure figures shown in 2.1 and the details above demonstrate the scope of this activity and, by approving these figures, consider the scale proportionate to the Authority’s remaining activity. 2.3 Liability Benchmark A third prudential indicator is the Debt Liability Benchmark (LB). The Authority is required to estimate and measure the LB for the forthcoming financial year and the following two financial years, as a minimum. There are four components to the Liability Benchmark: - 1 Existing loan debt outstanding: the Council’s existing loans that are still outstanding in future years. 2 Loans CFR: this is calculated in accordance with the loans CFR definition in the Prudential Code and projected into the future based on approved prudential borrowing and planned Loans Fund advances/Loans Fund principal repayments. 3 Net loans requirement: this shows the Council’s gross loan debt less treasury management investments at the last financial year-end, projected into the future and based on its approved prudential borrowing, planned Loans Fund principal repayments and any other major cash flows (drawdowns/enhancement of reserves) forecast. 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's Capital Financing Requirement CFR – General Services 186,624£ 223,966£ 296,175£ 406,407£ 482,336£ 496,804£ CFR – HRA 283,242£ 325,235£ 397,755£ 442,630£ 466,732£ 496,802£ CFR – PFI Schemes 84,815£ 80,661£ 76,277£ 71,663£ 66,819£ 61,745£ Total CFR 554,681£ 629,862£ 770,207£ 920,700£ 1,015,887£ 1,055,351£ Movement in CFR 64,796£ 75,181£ 140,345£ 150,492£ 95,187£ 39,465£ Movement in CFR represented by Net financing need for the year (previous table) 73,624£ 85,629£ 156,747£ 169,578£ 116,765£ 63,106£ MEL Shareholder Injection 4,590£ -£ -£ -£ -£ -£ Less Scheduled Debt Amortisation (9,494)£ (10,884)£ (12,018)£ (14,472)£ (16,734)£ (18,567)£ Less net PFI Finance Lease Principal Payments (3,924)£ (4,154)£ (4,384)£ (4,614)£ (4,844)£ (5,074)£ Movement in CFR 64,796£ 70,591£ 140,345£ 150,492£ 95,187£ 39,465£ Table 3: Capital Financing Requirement (CFR) Page 124 of 246
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9 4 Liability benchmark (or gross loans requirement): this equals net loans requirement plus short-term liquidity/working capital allowance. 2.4 Core funds and expected investment balances The application of resources (capital receipts, reserves etc.) to either finance capital expenditure or other budget decisions to support the revenue budget will have an ongoing impact on investments unless resources are supplemented each year from new sources (asset sales etc.). Detailed below are estimates of the year- end balances for each resource and anticipated day-to-day cash flow balances. *Working capital balances shown are estimated year-end; these may be higher mid-year 2.5 Statutory repayment of loans fund advances Under the Local Government Finance Circular 7/2016, Council is now required to set out its policy for the statutory repayment of loans fund advances prior to the start of each financial year. The repayment of loans fund advances ensures that the Council makes a prudent provision each year to pay off an element of the accumulated loans fund advances made in previous financial years. It is proposed to retain the methodology adopted in 2025/26 – that is as follows:- New Assets £0 £200,000 £400,000 £600,000 £800,000 £1,000,000 £1,200,000 Total Amount (£'000) Liability Benchmark PWLB Loans Market Loans (excl LOBO loans) LOBO Loans Existing Loan Debt Outstanding Net Loans Requirement (forecast net loan debt) Loans CFR Liability Benchmark (Gross Loans Requirement) 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's HRA Balances 31,910£ 29,510£ 28,242£ 26,329£ 24,890£ 23,978£ General Fund Balances 9,877£ 7,000£ 6,000£ 6,000£ 6,000£ 6,000£ Earmarked reserves 22,152£ 13,767£ 6,883£ -£ -£ -£ Provisions 3,756£ 3,656£ 3,556£ 3,456£ 3,356£ 3,256£ Capital Fund 17,600£ 18,193£ 18,718£ 18,918£ 19,118£ 19,318£ Total Reserves / Core Funds 85,295£ 72,126£ 63,399£ 54,703£ 53,364£ 52,552£ Working capital* 35,126£ 39,052£ 39,052£ 39,052£ 39,052£ 39,052£ Under/over borrowing 90,421£ 91,178£ 82,451£ 73,755£ 72,416£ 71,604£ Expected investments 30,000£ 20,000£ 20,000£ 20,000£ 20,000£ 20,000£ Reserve Table 4: Balance Sheet Resources Page 125 of 246
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10 In accordance with Finance Circular 7/2016, for all advances made in relation to the provision of a new asset, the policy will be to defer the commencement of the first principal repayment of the loans fund advance until the financial year following the one in which the asset is first available for use. Prudent Repayment of Loans Fund Advances Finance Circular 7/2016 provides a variety of options to Councils for the profiling of the repayment of each loans fund advance, so long as the principle of prudence is maintained. There are 4 options available: (a) Asset Life method; (b) Statutory method; (c) Depreciation method; and (d) Funding/income profile method. In line with the policy adopted in 2025/26, the Asset Life method shall be used for those assets in Table 5. Table 5: Asset Classes adopting the “Asset Life” method Infrastructure Curren Loans Fund Advance Period New Primary Schools/Extensions 60 New Leisure Centres 60 New Offices 60 Road Upgrades 50 Street Lighting Columns 50 Structures/Bridges 50 Footway/Cyclepaths 50 Town Centre Environmental Improvements 50 New Care Homes 45 Children’s Play Equipment 20 The annual repayments under the “Asset Life” method for those asset classes as noted above will be calculated using the asset lives and will use the annuity method, to ensure consistency of approach with the Statutory method for all other asset classes (see below). The annuity interest rate that will be used to calculate loans fund principal repayments under the “Asset Life” method will be the in-year loans fund rate, which for 2025/26 is currently estimated to be 2.97%. For all other asset classes, the policy will also be to profile the annual repayments under the “Asset Life” method, with the profile also calculated using the annuity method. The annuity interest rate that will be used to calculate loans fund principal repayments under the “Asset Life” method will be the in-year loans fund rate, which for 2025/26 is currently estimated to be 2.97%. Whilst neither the Depreciation nor the Funding/income profile methods are currently proposed, Council officers will continue to monitor whether it is appropriate to use this for future capital projects. Page 126 of 246
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11 3 Borrowing The capital expenditure plans set out in Section 2 provide details of the service activity of the Council. The treasury management function ensures that the Council’s cash is organised in accordance with the the relevant professional codes, so that sufficient cash is available to meet this service activity. This will involve both the organisation of the cash flow and, where capital plans require, the organisation of approporiate borrowing facilities. The strategy covers the relevant treasury / prudential indicators, the current and projected debt positions and the annual investment strategy. 3.1 Treasury management portfolio position The overall treasury management portfolio as at 31 March 2025 and for the position as at 30 January 2026 are shown below for both borrowing and investments. Table 6: Portfolio Position 31 March 2025 and 30 January 2026 The Council’s forward projections for borrowing and investments are summarised below. The table shows the actual external debt (the treasury management operations), against the underlying capital borrowing need (the Capital Financing Requirement - CFR), highlighting any over or under borrowing. Within the range of prudential indicators there are a number of key indicators to ensure that the Council operates its activities within well-defined limits. One of these is that the Council needs to ensure that its gross debt does not, except in the short term, exceed Principal Weighted Principal Weighted Outstanding Average Outstanding Average £000’s Rate £000’s Rate PWLB Annuity 395 8.92% 332 8.92% PWLB Maturity 333,502 3.11% 340,283 3.12% PWLB EIP 10,000 4.49% 67,542 4.24% LOBO 15,000 4.63% 15,000 4.63% Market Loans 20,548 3.04% 19,866 3.04% Total Loans 379,445 3.21% 443,024 3.34% Principal Weighted Principal Weighted Outstanding Average Outstanding Average £000’s Rate £000’s Rate Bank Call Accounts 538 4.34% 683 3.51% Money Market Funds 25,946 4.54% 19,689 3.88% Bank Fixed Term Deposits - n/a 10,000 4.18% Total Deposits 26,484 4.54% 30,372 3.97% 30 January 202631 March 2025 31 March 2025 30 January 2026 Loan Type Deposit Type 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 Actual Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's £000's External Debt Debt at 1 April 340,871£ 379,445£ 458,024£ 611,479£ 775,282£ 876,652£ Actual/Expected change in Debt 38,574£ 78,579£ 153,456£ 163,802£ 101,370£ 45,351£ Other long-term liabilities (OLTL) at 1 April 88,739£ 84,815£ 80,661£ 76,277£ 71,663£ 66,819£ Actual/Expected change in OLTL (3,924)£ (4,154)£ (4,384)£ (4,614)£ (4,844)£ (5,074)£ Actual/Expected Gross Debt at 31 March 464,260£ 538,685£ 687,756£ 846,945£ 943,471£ 983,747£ The Capital Financing Requirement 554,681£ 629,862£ 770,207£ 920,700£ 1,015,887£ 1,055,351£ Under / (over) borrowing 90,421£ 91,178£ 82,451£ 73,755£ 72,416£ 71,604£ Deposits Cash & Cash Equivalents 20,000£ 20,000£ 20,000£ 20,000£ 20,000£ 20,000£ Short-Term Investments 10,000£ -£ -£ -£ -£ -£ Total Deposits 30,000£ 20,000£ 20,000£ 20,000£ 20,000£ 20,000£ Table 7: Net Borrowing Requirement Page 127 of 246
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12 the total of the CFR in the preceding year plus the estimates of any additional CFR for 2026/27. The Chief Financial Officer & Section 95 Officer reports that the Council complied with this prudential indicator in the current year and does not envisage difficulties for the future. This view takes into account current commitments, existing plans, and the proposals in this budget report. Page 128 of 246
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13 3.2 Treasury Indicators: limits to borrowing activity The operational boundary This is the limit beyond which external debt is not normally expected to exceed. In most cases, this would be a similar figure to the CFR, but may be lower or higher depending on the levels of actual debt. For this Council:- • the Operational Boundary for Borrowing has been calculated to equate directly to the in-year value of the CFR over the current and following 4 financial years (2025/26 to 2029/30); and • the Operational Boundary for Other Long-Term Liabilities has been calculated to equate directly to the in-year CFR for Other Long-Term Liabilities, given the known contractual provisions for the repayment of debt within the Council’s two PPP agreements. The authorised limit for external debt This indicator sets the limit for total external debt. The Authorised Limit for Borrowing for the 2026/27 financial year has been calculated to equate to the maximum value of the Underlying Borrowing Requirement in 2026/27. This equates to £693.930 million as outlined below. 2025/26 2026/27 2027/28 2028/29 2029/30 Estimate Estimate Estimate Estimate Estimate £000's £000's £000's £000's £000's Operational Boundary - Borrowing 549,201£ 693,930£ 849,037£ 949,068£ 993,606£ Operational Boundary - Other long term liabilities 80,661£ 76,277£ 71,663£ 66,819£ 61,745£ Total 629,862£ 770,207£ 920,700£ 1,015,887£ 1,055,351£ Table 8: Operational Boundary £000's CFR - General Services at 31 March 2027 296,175£ CFR - HRA at 31 March 2027 397,755£ Authorised Limit for Borrowing 693,930£ Table 9: Authorised Limit for Borrowing 458,024 611,479 775,282 876,652 922,002 £- £100,000 £200,000 £300,000 £400,000 £500,000 £600,000 £700,000 £800,000 £900,000 £1,000,000 2025/26 2026/27 2027/28 2028/29 2029/30 £000's Financial Year Prudential Indicators for Borrowing External Debt Authorised Limit Underlying Borrowing Requirement / Operational Boundary Page 129 of 246
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14 3.3 Prospects for interest rates The Council has appointed MUFG Corporate Markets as its treasury advisor and part of their service is to assist the Council to formulate a view on interest rates. MUFG provided the following forecasts for certainty rates (gilt yields plus 80 bps) on 22 December 2025. MUFG’s revised PWLB rate forecasts below are based on the Certainty Rate (the standard rate minus 20 bps). Table 10: MUFG Interest Rate Forecasts In the second half of 2025, a combination of tepid growth (0.2% q/q GDP for Q2 and 0.1% q/q GDP for Q3), falling inflation (currently CPI is 3.2%), and a November Budget that will place more pressure on the majority of households’ income, has provided an opportunity for the Bank of England’s Monetary Policy Committee to further reduce Bank Rate from 4.00% to 3.75% on 18 December. Surprisingly, to most market commentators, the recent steep fall in CPI inflation in one month from 3.6% to 3.2% did not persuade most “dissenters” from the November vote (Lombardelli, Greene, Mann and Pill) to switch to the rate-cutting side of the Committee. Instead, it was the Bank Governor, Andrew Bailey’s deciding vote which resulted in a rate cut by the slimmest of margins, 5-4. Given the wafer-thin majority for a rate cut it was not unexpected to hear that although rates would continue on a “gradual downward path”, suggesting a further rate cut or cuts in the offing, MPC members want to assess incoming evidence on labour market activity and wage growth. Indeed, with annual wage growth still over 4.5%, the MPC reiterated that the case for further rate cuts would be “a closer call”, and Governor Bailey observed there is “limited space as Bank Rate approaches a neutral level”. Accordingly, the MUFG Corporate Markets forecast has been revised to price in a rate cut in Q2 2026 to 3.50%, likely to take place in the wake of a significant fall in the CPI inflation reading from 3.00% in March to 2.00% in April (as forecast by Capital Economics), followed by a short lull through the summer whilst more data is garnered, and then a further rate cut to 3.25% in Q4. However, threats to this central scenario abound. What if wage increases remain stubbornly high? There are, after all, several sectors of the domestic economy, including social care provision and the building/construction industries, where staff shortages remain severe. Moreover, by May 2026, following the local elections, there will be better clarity on the leadership of the main UK political parties, which will influence gilt markets …and will there be additional geo-political factors to also bake in, particularly the Fed’s monetary policy decisions in 2026 and the ongoing battle to lower rates whilst inflation remains close to 3.00%. Accordingly, MUFG’s updated central forecast is made with several caveats. Whilst the confidence that the central forecast for Bank Rate and the 5-year PWLB Certainty Rate is robust, they have marginally brought forward the timing of the next rate cut(s). However, for the 10-, 25- and 50-years part of the gilt curve, the level of gilt issuance, and the timing of its placement, will be integral to achieving a benign trading Bank Rate 3.75% 3.50% 3.50% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3 month average earnings 3.80% 3.50% 3.50% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 6 month average earnings 3.80% 3.50% 3.50% 3.40% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 12 month average earnings 3.90% 3.60% 3.60% 3.50% 3.40% 3.50% 3.50% 3.50% 3.50% 3.50% 3.60% 3.60% 3.60% 5 year PWLB 4.60% 4.50% 4.30% 4.20% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 10 year PWLB 5.20% 5.00% 4.90% 4.80% 4.80% 4.70% 4.70% 4.70% 4.70% 4.60% 4.60% 4.60% 4.70% 25 year PWLB 5.80% 5.70% 5.60% 5.50% 5.50% 5.40% 5.30% 5.30% 5.30% 5.20% 5.20% 5.20% 5.20% 50 year PWLB 5.60% 5.50% 5.40% 5.30% 5.30% 5.20% 5.10% 5.10% 5.10% 5.00% 5.10% 5.00% 5.00% MUFG Corporate Markets Interest Rate View Mar-28 Jun-28 Sep-28 Dec-28 Mar-29Mar-26 Jun-26 Sep-26 Dec-26 Dec-27Sep-27Jun-27Mar-27 Page 130 of 246
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15 environment. That is not a “given”, and additionally, the inflation outlook and political factors domestically and, crucially, in the US, are also likely to hold sway. Matters should be clearer by June in the UK, but the US mid-term elections are scheduled for November. MUFG’s revised PWLB rate forecasts are based on the Certainty Rate (the standard rate minus 20 bps) which has been accessible to most authorities since 1 November 2012. The lower Housing Revenue Account (HRA) PWLB rate started on 15 June 2023 for those authorities with an HRA (standard rate minus 60 bps) and has recently been announced as being extended into the 2026/27 financial year. Money market yield forecasts are based on expected average earnings by local authorities for 3 to 12 months. A more detailed interest rate view and economic commentary is provided at appendix 5.1. Page 131 of 246
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16 3.4 Borrowing strategy Borrowing is undertaken to finance the Council’s approved Capital plans and to do so in the most cost-effective way. As can be noted from Table 3 of the main report, the Council has a significant borrowing requirement across the current and forthcoming four financial years (2025/26 to 2029/30). This TMIS provides for this capital investment to be underpinned by long-term borrowing, recognising the current interest rate environment, the significant borrowing requirement arising from the Council’s capital plans, and the long term benefits of de risking the delivery and affordability of these capital plans by locking into the certainty brought by PWLB fixed rate loans. The Council’s external loan debt at 31 March 2026 is projected to be £458.024 million. Based on the Council’s historic and current approved Capital Plans, the Underlying Borrowing Requirement (UBR) – which is the Council’s underlying need to borrow for capital purposes (excluding the long-term liability arising from PFI/DBFM projects) – at 31 March 2026 is expected to equate to £549.201 million. This means that the Council is expected to be £91.177 million (17%) under- borrowed at the end of the 2025/26 financial year i.e. the Council has funded the majority (83%) of its underlying borrowing requirement as at 31 March 2026. In the current economic climate, this is a prudent approach which balances (a) de-risking the longer term borrowing requirement at current longer term borrowing rates; against (b) the current year and forthcoming financial year budget projections. The Council has a relatively low short-medium term exposure to refinancing risk and is therefore in a strong position to plan its new borrowing requirements in advance, taking 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. The Underlying Borrowing Requirement is projected to rise to £993.034 million by 31 March 2030 – more than double the current external debt portfolio value of £443.024 million. The profile of this, and the projected external loan portfolio to fund the Underlying Borrowing Requirement over the period 2025/26 to 2029/30, is shown in graphical format below. Figure 3: Loan Portfolio & Underlying Borrowing Requirement Interest Rates The current PWLB yield curve is bell shaped with the low point in the curve at the time of writing sitting at the shortest tenors (1-3 years @ c. 4.50%; certainty rate) with rates trending upwards towards the 25-30 year tenor (high point of 6.03%; certainty rate) before easing back slightly to sit at c. 5.79% (certainty rate) in the 50 year duration. Page 132 of 246
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17 Current PWLB rates have generally increased by c. 20bps across the majority of the interest rate curve from levels reported at the time of the 2025/26 TMIS to Council in February 2025, and as noted in the TM Mid-Year Review Report to Council in December 2025, are expected to remain elevated for longer, particularly at the medium-longer end of the curve. This reflects ongoing concerns around the stickiness of inflation and international factors emanating from the Trump administration's fiscal, tariff and geo-political policies which continue to play a significant role in market expectations. The forward-looking Interest Rate Forecast from the Council's Treasury Advisers, MUFG Corporate Markets, is as shown in Table 10 in Section 3.3 above, with Further commentary on this is provided in Appendix 3 Section 3.3. As can be noted in Table 4 above, 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. 30-40bps over the next 12 months, a further 10-20bps over the subsequent 12 months and a further 10bps in the medium/longer end over the following 12 months of the forecast period (so 50-60bps total). This is forecast to bring longer-term borrowing rates down from between 5.79%- 6.03%, to between:- • 5.60%-5.80% by March 2026; • 5.30%-5.50% by March 2027; and • 5.10%-5.30% by March 2028. Borrowing Strategy 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. Given the Council's borrowing requirement across 2025/26 to 2029/30 as outlined in Table 3, and the Interest Rate Forecasts as outlined in Table 4, consideration for any new borrowing, to fund the Council's CFR, will seek to balance:- a) the security/certainty of current relatively high longer-term borrowing rates of upwards of 5.60% in the 30-50 year duration (which are forecast to drop by 30bps within one year and a total of 50bps 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 3 to 5 years (at say c. 3.80-4.20% at the HRA rate), to allow the Council to fund the immediate in-year borrowing requirement. Based on current interest rate forecasts (see Appendix 3 Section 3.3), this would then allow the Council the option to refinance this borrowing at initial 3-5 year maturity with less expensive, longer term borrowing, e.g. a 45 to 47 year tenor in, say, 36 months at a forecast rate of c. 4.60-4.80% (HRA Rate). Any further long-term borrowing that is undertaken to finance the current & future year capital plans is expected to 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 to fund HRA capital expenditure, at a rate that is priced at Gilts+40bps, with an extension of the availability of this rate beyond 31 March 2026 (and so into financial year 2026/27) announced by the UK Government's Ministry of Housing, Communities & Local Page 133 of 246
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18 Government (MHCLG) on 28 January 2026 . Other market-led longer-term borrowing opportunities will be benchmarked against the prevailing PWLB rates to assess whether they offer value to the Council. Council officers, in conjunction with MUFG, 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. Forward Borrowing The opportunity also continues to exist to consider further loans on a 'forward dealing' basis, and officers will continue to explore the viability of these loans as part of securing the long term borrowing required to meet the Council's Underlying Borrowing Requirement. Review of Capital Plans & Impact on Borrowing Strategy 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. 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 medium-long-term. Treasury management limits on activity There are three debt related treasury activity limits. The purpose of these are to restrain the activity of the treasury function within certain limits, thereby managing risk and reducing the impact of any adverse movement in interest rates. However, if these are set to be too restrictive they will impair the opportunities to reduce costs / improve performance. The indicators are: • Upper limits on variable interest rate exposure. This identifies a maximum limit for variable interest rates for borrowing based upon the gross debt position, and variable interest rates for investments based upon the total investment position; • Upper limits on fixed interest rate exposure. This is similar to the previous indicator and covers a maximum limit on fixed interest rates for both borrowing and investments; • Maturity structure of borrowing. These gross limits are set to reduce the Council’s exposure to large fixed rate sums falling due for refinancing, and are required for upper and lower limits. The Council is asked to approve the following treasury indicators and limits: Limits on fixed interest rates based on gross debt 100.00% Limits on variable interest rates based on gross debt 30.00% Limits on fixed interest rates based on investments 100.00% Limits on variable interest rates based on investments 100.00% Table 11: Upper Limits on Exposure to Fixed and Variable Interest Rates 2026/27 Interest rate exposures Upper Limit Page 134 of 246
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19 3.5 Policy on borrowing in advance of need The Council will not borrow more than or in advance of its needs purely in order to profit from the investment of the extra sum borrowed. Any decision to borrow in advance will be within forward approved Capital Financing Requirement estimates (as detailed in Section 3.2) and will be considered carefully to ensure that value for money can be demonstrated and that the Council can ensure the security of such funds. Risks associated with any borrowing in advance activity will be subject to prior appraisal and subsequent reporting through the mid-year or annual reporting mechanism. 3.6 Debt rescheduling As noted in the Mid-Year Review Report, the Council elected to reschedule (prematurely repay) PWLB debt as follows:- • £12.700 million PWLB Maturity loan, original drawn date of 2 August 2007 and existing maturity date of 15 May 2053, at a fixed interest rate of 4.55% Any further 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 MUFG Treasury Solutions; with only prudent and affordable debt rescheduling that considers both the short and medium-longer term impact being considered. Maturity structure of fixed interest rate borrowing 2026/27 Lower Upper 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00% 50.00% Maturity structure of variable interest rate borrowing 2026/27 Lower Upper 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% 0.00% 30.00% Table 12: Maturity Structure of Borrowing 2026/27 5 years to 10 years 10 years to 20 years 20 years to 30 years 30 years to 40 years 40 years to 50 years 50 years and above Under 12 months 12 months to 2 years 2 years to 5 years 2 years to 5 years 5 years to 10 years 10 years to 20 years 20 years to 30 years 30 years to 40 years Under 12 months 12 months to 2 years 50 years and above 40 years to 50 years Page 135 of 246
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20 4 ANNUAL INVESTMENT STRATEGY 4.1 Investment policy The Council’s investment policy implements the requirements of the following: - • Local Government Investments (Scotland) Regulations 2010, (and accompanying Finance Circular 5/2010); • CIPFA Treasury Management in the Public Services: Code of Practice and Cross Sectoral Guidance Notes 2021 (“the Code”); • CIPFA Treasury Management Guidance Notes 2021 The Council’s investment priorities will be security first, portfolio liquidity second and then yield, (return). The Council will aim to achieve the optimum return (yield) on its investments commensurate with proper levels of security and liquidity and with the Council’s risk appetite. In the current economic climate, it is considered appropriate to maintain a degree of liquidity to cover cash flow needs but to also consider “laddering” investments for periods up to 12 months with high credit rated financial institutions as we move down the interest rate yield curve. The above regulations and guidance place a high priority on the management of risk. This authority has adopted a prudent approach to managing risk and defines its risk appetite by the following means: - 1. The Council applies minimum acceptable credit criteria in order to generate a list of highly creditworthy counterparties which also enables diversification and thus avoidance of concentration risk. The key ratings used to monitor counterparties are the short-term and long-term ratings. 2. Ratings will not be the sole determinant of the quality of an institution; it is important to continually assess and monitor the financial sector on both a micro and macro basis and in relation to the economic and political environments in which institutions operate. The assessment will also take account of information that reflects the opinion of the markets. To this end the Council will engage with its advisors to maintain a monitor on market pricing such as “credit default swaps” and overlay that information on top of the credit ratings. 3. Other information sources used will include the financial press, share price and other such information pertaining to the banking sector in order to establish the most robust scrutiny process on the suitability of potential investment counterparties. 4. This authority has defined the list of types of investment instruments that are permitted investments authorised for use in appendix 5.2. Appendix 5.3 expands on the risks involved in each type of investment and the mitigating controls. 5. Lending limits, (maturity tenors), for each counterparty will be set through applying the matrix table in Section 4.2 (maturity durations). 6. Investments will only placed with counterparties from countries with a specified minimum sovereign rating, (see paragraph 4.3). 7. Lending per Country and Institution will be set through the application of the criteria in Section 4.3 (amounts). Page 136 of 246
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21 8. Transaction limits are set for each type of investment in appendix 5.2. 9. This authority will set a limit for the amount of its investments which are invested for longer than 365 days, (see paragraph 4.4). 10. This authority has engaged external consultants, (see paragraph 1.5), to provide expert advice on how to optimise an appropriate balance of security, liquidity and yield, given the risk appetite of this authority in the context of the expected level of cash balances and need for liquidity throughout the year. 11. All investments will be denominated in sterling. However, this authority will also pursue value for money in treasury management and will monitor the yield from investment income against appropriate benchmarks for investment performance, (see paragraph 4.5). Regular monitoring of investment performance will be carried out during the year. Page 137 of 246
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22 4.2 Creditworthiness policy This Council applies the creditworthiness service provided by MUFG Corporate Markets. This service employs a sophisticated modelling approach utilising credit ratings from the three main credit rating agencies - Fitch, Moody’s and Standard and Poor’s. The credit ratings of counterparties are supplemented with the following overlays:- • credit watches and credit outlooks from credit rating agencies; • CDS spreads to give early warning of likely changes in credit ratings; • sovereign ratings to select counterparties from only the most creditworthy countries. This modelling approach combines credit ratings, credit watches and credit outlooks in a weighted scoring system which is then combined with an overlay of CDS spreads for which the end product is a series of colour coded bands which indicate the relative creditworthiness of counterparties. These colour codes are used by the Council to determine the suggested duration for investments. The Council will therefore use counterparties within the following durational bands:- Note that the maximum suggested durations listed above have been extended by 1 year (when compared to the suggested maximum durations provided by MUFG) for the Yellow, Dark Pink, Light Pink, Purple, Blue and Orange categories, to allow flexibility around these durations on the margins e.g. the placement of a 13 month fixed term deposit for a counterparty rated Orange or Blue. Equally, the maximum suggested duration for the Red category has been extended by a month to 8 months, on the same basis. A thorough appraisal of the additional risk involved in extending the duration of any deposit (marginally) beyond the maximum suggested by Capita, against any enhanced value to the portfolio, will be undertaken prior to the placement of any deposit. The MUFG Corporate Markets creditworthiness service uses a wider array of information than just primary ratings. Furthermore, by using a risk weighted scoring system, it does not give undue preponderance to just one agency’s ratings. Link Asset Services Colour Code Maximum Suggested Duration for Investment Yellow 6 years* Dark Pink 6 years** Light Pink 6 years** Purple 2.5 years Blue 1.25 years*** Orange 1.25 years Red 7 months Green 120 days No colour Not to be used * Note the yellow colour category is for:- UK Government Debt, or its equivalent, Money Market Funds (MMF's), and collateralised deposits where the collateral is UK Government Debt ** Dark Pink for Ultra Short Dated Bond Funds with a credit score of 1.25 Light Pink for Ultra Short Dated Bond Funds with a credit score of 1.5 *** Applies only to nationalised or semi-nationalised UK Banks Table 13: Recommended Maximum Durations for Investments Page 138 of 246
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23 Typically the minimum credit ratings criteria the Council use will be (Fitch or equivalents):- • Short term rating F1; • Long term rating A-. There may be occasions when the counterparty ratings from one rating agency are marginally lower than these ratings but may still be used. In these instances consideration will be given to the whole range of ratings available, or other topical market information, to support their use. All credit ratings will be monitored weekly. The Council is alerted to changes to ratings of all three agencies through its use of the MUFG Corporate Markets creditworthiness service. • if a downgrade results in the counterparty / investment scheme no longer meeting the Council’s minimum criteria, its further use as a new investment will be withdrawn immediately; • in addition to the use of credit ratings the Council will be advised of information in movements in credit default swap spreads against the iTraxx benchmark and other market data on a daily basis via its Passport website, provided exclusively to the Council by MUFG Corporate Markets. Extreme market movements may result in downgrade of an institution or removal from the Council’s lending list. Sole reliance will not be placed on the use of this external service. In addition this Council will also use market data and market information, information on sovereign support for banks and the credit ratings of that supporting government. UK banks – ring fencing The largest UK banks, (those with more than £25bn of retail / Small and Medium-sized Enterprise (SME) deposits), are required, by UK law, to separate core retail banking services from their investment and international banking activities by 1st January 2019. This is known as “ring-fencing”. Whilst smaller banks with less than £25bn in deposits are exempt, they can choose to opt up. Several banks are very close to the threshold already and so may come into scope in the future regardless. Ring-fencing is a regulatory initiative created in response to the global financial crisis. It mandates the separation of retail and SME deposits from investment banking, in order to improve the resilience and resolvability of banks by changing their structure. In general, simpler, activities offered from within a ring-fenced bank, (RFB), will be focused on lower risk, day-to-day core transactions, whilst more complex and “riskier” activities are required to be housed in a separate entity, a non-ring-fenced bank, (NRFB). This is intended to ensure that an entity’s core activities are not adversely affected by the acts or omissions of other members of its group. While the structure of the banks included within this process may have changed, the fundamentals of credit assessment have not. The Council will continue to assess the new- formed entities in the same way that it does others and those with sufficiently high ratings, (and any other metrics considered), will be considered for investment purposes. 4.3 Country and sector limits The Council has determined that it will only use approved counterparties from the UK, or approved counterparties from other countries with a minimum sovereign credit rating of AA- from Fitch. The list of countries that qualify using the above criteria as at the date of this report are shown in Appendix 5.4. This list will be added to, or deducted from, by officers should ratings change in accordance with this policy. Page 139 of 246
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24 The Council will avoid a concentration of investments in too few counterparties or countries by adopting a spreading approach to investing whereby no more than £30 million will be invested in Lloyds Banking Group and the NatWest (Royal Bank of Scotland) Group, £15 million in any other UK counterparty, and £15 million in any one counterparty, group or country outwith the UK. 4.4 Investment strategy Current Deposits As at 30 January 2025, the Council’s deposits were as shown in Table 14 below:- Table 14: Council’s deposits at 30 January 2025 Counterparty Amount £000’s Security Long/Short Term Rating* (Colour)** Liquidity Yield UK Local Authority Investment*** £000’s MMF Aberdeen 1,683 AAAmmf (Yellow) Instant Access 3.86% 1,598,647 MMF Federated 14,650 AAAmmf (Yellow) Instant Access 3.86% 1,995,304 MMF LGIM 3,357 AAAmmf (Yellow) Instant Access 3.86% 608,296 Bank of Scotland Call Account 622 AA-/F1+ (Orange) Instant Access 3.51% 351,953 Handelsbanken AB Call Account 20 AA/F1+ (Orange) Instant Access 3.65% 103,416 Lloyds Banking Group Corporate Markets 10,000 AA-/F1 (Orange) Start: 29 Apr 2025 End: 29 Apr 2026 4.18% 182,632 Total 30,372 4,840,248 * Credit Rating from Fitch ** Colour represents maximum recommended duration for deposit per MUFG Corporate Markets Credit Scoring methodology – see Appendix 2. *** As at 31 December 2025 In-house funds. Investments will be made with reference to the core balance and cash flow requirements and the outlook for short-term interest rates (i.e., rates for investments up to 12 months, with the yield curve reducing the further out deposits are placed). While an element of cash balances are required in order to manage the ups and downs of cash flow, where cash sums can be identified that could be invested for longer periods, the value to be obtained from longer term investments will be carefully assessed. • If it is thought that Bank Rate is likely to fall within that time period, consideration will be given to locking in higher rates currently obtainable, for longer periods, where this is possible within the Council’s day-to-day and monthly cashflow projections; • Conversely, if it is thought that Bank Rate is likely to rise significantly within the time horizon being considered (unlikely in the current climate), then consideration will be given to keeping most investments as being short term or variable. Investment returns expectations The current forecast shown in paragraph 3.3, includes a forecast for Bank Rate to reduce from the current level of 3.75% at the time of writing (30 January 2026) to 3.25% by the end of the forecast time horizon (December 2027). The suggested budgeted investment earnings rates for returns on investments placed for periods up to about three months during each financial year are as shown in Table 15: - Page 140 of 246
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25 Table 15: Suggested budgeted average earnings per annum Average earnings in each year 2025/26 (residual) 3.80% 2026/27 3.40% 2027/28 3.30% 2028/29 3.30% 2029/30 3.50% Long term later years 3.50% As there are so many variables at this time, caution must be exercised in respect of all interest rate forecasts. Investment treasury indicator and limit - total principal funds invested for greater than 365 days. These limits are set with regard to the Council’s liquidity requirements and expected usable reserve forecasts, and are based on the availability of funds after each year-end. The Council is asked to retain the following treasury indicator and limit: - For its cash flow generated balances, the Council will seek to utilise its business reserve instant access accounts and money market funds. 4.5 Environmental, Social and Governance Criteria in Credit & Counterparty Policies (Treasury Management Practice 1) The inclusion of ESG criteria continues to be an emerging area in the Local Authority environment which will require ongoing monitoring. For the 2026/27 financial year, the Council’s priorities of security, liquidity and then yield remain paramount and unchanged (and in that order), with ESG criteria an added 4th element to consider in the decision making process. For short term investments with counterparties, this Council utilises the MUFG creditworthiness service which uses the ratings provided by Fitch, Moody’s and Standard & Poor’s to assess creditworthiness, which in themselves include analysis of ESG factors, and specifically the “G” element, when assigning ratings. Of the 3 elements of ESG, the most important element when considering treasury deposits is the Governance aspect – given the majority of treasury deposits undertaken by Midlothian Council are naturally short dated in duration, poor governance can have a more immediate impact on the financial circumstances of an entity and potential for a default event that could impact the amount of principal returned on the deposit. Those financial institutions viewed as having poor/weak corporate governance are generally less well credit rated in the first instance or have a higher propensity for being subject to negative rating action, and the Council’s existing creditworthiness policy will therefore take this into account. Environment and Social factors are also important, but relate more to the long-term impact. Council should note that in relation to the security aspect of Treasury deposits, placing an undue weight on the Environmental and Social factors in the decision making process could have an adverse effect of limiting the list of potential counterparty options, thus decreasing diversification. This could then in turn lead to a widening of credit (security) criteria, or those Limit £70m Principal Sums Invested for > 365 Days Page 141 of 246
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26 with a stronger “ESG” performance, in order to restore a balance of diversification across the deposit portfolio, potentially increasing credit risk – and placing the cornerstone of prudent investing at risk. The inclusion of ESG criteria therefore remains an area which requires ongoing review. Council officers, in conjunction with the Council’s treasury advisers MUFG, will therefore continue to monitor and assess ongoing developments and emerging standards in this area, and methods in which the Council can incorporate ESG factors into our creditworthiness assessment process, and report back to Council accordingly. 4.6 Investment risk benchmarking The Council will use an investment benchmark to assess the investment performance of its investment portfolio of 6 month SONIA compounded. The Council also participates in Investment Benchmarking groups with MUFG Corporate Markets whereby performance with other Benchmarking club members and the wider Scottish and UK Local Authority Investment benchmarking is compared. 4.7 End of year investment report At the end of the financial year, the Council will report on its investment activity as part of its Annual Treasury Report. Page 142 of 246
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27 5 Appendices 1. Economic background 2. Treasury Management Practice 1 – Permitted Investments 3. Treasury Management Practice 1 – Credit and Counterparty Risk Management 4. Approved countries for investments 5. Treasury management scheme of delegation 6. The treasury management role of the section 95 officer Page 143 of 246
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28 5.6 APPENDIX: Economic Background The first half of 2025/26 saw:- - A 0.3% pick up in GDP for the period April to June 2025. More recently, the economy flatlined in July, with higher taxes for businesses restraining growth, but picked up to 0.1% m/m in August before falling back by 0.1% m/m in September. - The 3m/yy rate of average earnings growth excluding bonuses has fallen from 5.5% to 4.6% in September. - CPI inflation has ebbed and flowed but finished September at 3.8%, whilst core inflation eased to 3.5%. - The Bank of England cut interest rates from 4.50% to 4.25% in May, and then to 4% in August (and subsequently to 3.75% in December). - The 10-year gilt yield fluctuated between 4.4% and 4.8%, ending the half year at 4.70% (before falling back to 4.43% in early November). From a GDP perspective, the financial year got off to a bumpy start with the 0.3% m/m fall in real GDP in April as front-running of US tariffs in Q1 (when GDP grew 0.7% on the quarter) weighed on activity. Despite the underlying reasons for the drop, it was still the first fall since October 2024 and the largest fall since October 2023. However, the economy surprised to the upside in May and June so that quarterly growth ended up 0.3% q/q (subsequently revised down to 0.2% q/q). Nonetheless, the 0.0% m/m change in real GDP in July, followed by a 0.1% m/m increase in August and a 0.1% decrease in September will have caused some concern. GDP growth for 2025 - 2028 is currently forecast by the Office for Budget Responsibility to be in the region of 1.5%. Sticking with future economic sentiment, the composite Purchasing Manager Index (PMI) for the UK increased to 52.2 in October. The manufacturing PMI output balance improved to just below 50 but it is the services sector (52.2) that continues to drive the economy forward. Nonetheless, the PMIs suggest tepid growth is the best that can be expected in the second half of 2025 and the start of 2026. Indeed, on 13 November we heard that GDP for July to September was only 0.1% q/q. Turning to retail sales volumes, and the 1.5% year-on-year rise in September, accelerating from a 0.7% increase in August, marked the highest gain since April. On a monthly basis, retail sales volumes rose 0.5%, defying forecasts of a 0.2% fall, following an upwardly revised 0.6% gain in August. Household spending remains surprisingly resilient, but headwinds are gathering. Prior to the November Budget, the public finances position looked weak. The £20.2 billion borrowed in September was slightly above the £20.1 billion forecast by the OBR. For the year to date, the £99.8 billion borrowed is the second highest for the April to September period since records began in 1993, surpassed only by borrowing during the COVID-19 pandemic. The main drivers of the increased borrowing were higher debt interest costs, rising government running costs, and increased inflation-linked benefit payments, which outweighed the rise in tax and National Insurance contributions. Following the 26 November Budget, the Office for Budget Responsibility (OBR) calculated the net tightening in fiscal policy as £11.7bn (0.3% of GDP) in 2029/30, smaller than the consensus forecast of £25bn. It did downgrade productivity growth by 0.3%, from 1.3% to 1.0%, but a lot of that influence was offset by upgrades to its near-term wage and inflation forecasts. Accordingly, the OBR judged the Chancellor was going to achieve her objectives with £4.2bn to spare. The Chancellor then chose to expand that headroom to £21.7bn, up from £9.9bn previously. Moreover, the Chancellor also chose to raise spending by a net £11.3bn in 2029/30. To pay for that and to increase n headroom, she raised taxes by £26.1bn in 2029/30. The biggest revenue-raisers were the freeze in income tax thresholds from 2028/29 (+£7.8bn) Page 144 of 246
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29 and the rise in NICs on salary-sacrifice pension contributions (+£4.8bn). The increase in council tax for properties worth more than £2.0m will generate £0.4bn. The weakening in the jobs market looked clear in the spring. May’s 109,000 m/m fall in the PAYE measure of employment was the largest decline (barring the pandemic) since the data began and the seventh in as many months. The monthly change was revised lower in five of the previous seven months too, with April’s 33,000 fall revised down to a 55,000 drop. More recently, however, the monthly change was revised higher in seven of the previous nine months by a total of 22,000. So instead of falling by 165,000 in total since October, payroll employment is now thought to have declined by a smaller 153,000. Even so, payroll employment has still fallen in nearly all the months since the Chancellor announced the rises in National Insurance Contributions (NICs) for employers and the minimum wage in the October 2024 Budget. The number of job vacancies in the three months to November 2025 stood at 729,000 (the peak was 1.3 million in spring 2022). All this suggests the labour market continues to loosen, albeit at a slow pace. A looser labour market is driving softer wage pressures. The 3m/yy rate of average earnings growth excluding bonuses has fallen from 5.5% in April to 4.6% in September (still at that level in November). The rate for the private sector has slipped just below 4% as the year end approaches. CPI inflation remained at 3.8% in September but dropped to 3.2% by November. Core inflation also fell to 3.2% by November while services inflation fell to 4.4%. Nonetheless, a further loosening in the labour market and weaker wage growth may be a requisite to UK inflation coming in below 2.0% by 2027. An ever-present issue throughout recent months has been the pressure being exerted on medium and longer dated gilt yields. The yield on the 10-year gilt moved sideways in the second quarter of 2025, rising from 4.4% in early April to 4.8% in mid-April following wider global bond market volatility stemming from the “Liberation Day” tariff announcement, and then easing back as trade tensions began to de-escalate. By the end of April, the 10-year gilt yield had returned to 4.4%. In May, concerns about stickier inflation and shifting expectations about the path for interest rates led to another rise, with the 10-year gilt yield fluctuating between 4.6% and 4.75% for most of May. Thereafter, as trade tensions continued to ease and markets increasingly began to price in looser monetary policy, the 10-year yield edged lower, and ended June at 4.50%. More recently, the yield on the 10-year gilt rose from 4.46% to 4.60% in early July as rolled-back spending cuts raised fiscal concerns. Although the spike proved short lived, it highlighted the UK’s fragile fiscal position. In an era of high debt, high interest rates and low GDP growth, the markets are now more sensitive to fiscal risks than before the pandemic. During August, long-dated gilts underwent a particularly pronounced sell-off, climbing 22 basis points and reaching a 27-year high of 5.6% by the end of the month. While yields have since eased back, the market sell-off was driven by investor concerns over growing supply-demand imbalances, stemming from unease over the lack of fiscal consolidation and reduced demand from traditional long-dated bond purchasers like pension funds. For 10-year gilts, by late September, sticky inflation, resilient activity data and a hawkish Bank of England kept yields elevated over 4.70% although by late December had fallen back again to a little over 4.50%. The FTSE 100 fell sharply following the “Liberation Day” tariff announcement, dropping by more than 10% in the first week of April - from 8,634 on 1 April to 7,702 on 7 April. However, the de-escalation of the trade war coupled with strong corporate earnings led to a rapid rebound starting in late April. As a result, the FTSE 100 ended June at 8,761, around 2% higher than its value at the end of March and more than 7% above its level at the start of 2025. Since then, the FTSE 100 has enjoyed a further 4% rise in July, its strongest monthly gain since January and outperforming the S&P 500. Strong corporate earnings and progress in trade talks (US-EU, UK-India) lifted share prices and the index hit a record 9,321 in mid-August, driven by hopes of peace in Ukraine and dovish signals Page 145 of 246
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30 from Fed Chair Powell. September proved more volatile and the FTSE 100 closed September at 9,350, 7% higher than at the end of Q1 and 14% higher since the start of 2025. Future performance will likely be impacted by the extent to which investors’ global risk appetite remains intact, Fed rate cuts, resilience in the US economy, and AI optimism. A weaker pound will also boost the index as it inflates overseas earnings. In early November, the FTSE100 climbed to a record high just above 9,900. By late December, the index had clung on to most of those gains standing at 9,870 on 23 December. MPC meetings: 8 May, 19 June, 7 August, 18 September, 6 November, December 2025 There were six Monetary Policy Committee (MPC) meetings held between April and December. In May, the Committee cut Bank Rate from 4.50% to 4.25%, while in June policy was left unchanged. In June’s vote, three MPC members (Dhingra, Ramsden and Taylor) voted for an immediate cut to 4.00%, citing loosening labour market conditions. The other six members were more cautious, as they highlighted the need to monitor for “signs of weak demand”, “supply-side constraints” and higher “inflation expectations”, mainly from rising food prices. By repeating the well-used phrase “gradual and careful”, the MPC continued to suggest that rates would be reduced further. In August, a further rate cut was implemented. However, a 5-4 split vote for a rate cut to 4.00% laid bare the different views within the Monetary Policy Committee, with the accompanying commentary noting the decision was “finely balanced” and reiterating that future rate cuts would be undertaken “gradually and carefully”. Ultimately, Governor Bailey was the casting vote for a rate cut but with the CPI measure of inflation expected to reach at least 4% later this year, the MPC was wary of making any further rate cuts until inflation begins its slow downwards trajectory back towards 2%. With wages still rising by just below 5%, it was no surprise that the September meeting saw the MPC vote 7-2 for keeping rates at 4% (Dhingra and Taylor voted for a further 25bps reduction). Moreover, the Bank also took the opportunity to announce that they would only shrink its balance sheet by £70bn over the next 12 months, rather than £100bn. The repetition of the phrase that “a gradual and careful” approach to rate cuts is appropriate suggested the Bank still thought interest rates will fall further. At the 6 November meeting, Governor Bailey was once again the deciding vote, keeping Bank Rate at 4% but hinting strongly that a further rate cut was imminent if data supported such a move. By 18 December, with November CPI inflation having fallen to 3.2%, and with Q2 GDP revised down from 0.3% q/q to only 0.2% q/q, and Q3 GDP stalling at 0.1%, the MPC voted by 5-4 to cut rates further to 3.75%. However, Governor Bailey made it clear that any further reductions would require strong supporting data, and the pace of any further decreases would be slow compared to recent months. The markets expect Bank Rate to next be cut in April 2026. Page 146 of 246
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31 5.7 APPENDIX: Treasury Management Practice (TMP1): Permitted Investments This Council is asked to approve the following forms of investment instrument for use as permitted investments as set out in tables 1.1-1.4. Treasury risks All the investment instruments in tables 1.1-1.4 are subject to the following risks:- 1. Credit and counter-party risk: this is the risk of failure by a counterparty (bank or building society) to meet its contractual obligations to the organisation particularly as a result of the counterparty’s diminished creditworthiness, and the resulting detrimental effect on the organisation’s capital or current (revenue) resources. There are no counterparties where this risk is zero although AAA rated organisations have the highest, relative, level of creditworthiness. 2. Liquidity risk: this is the risk that cash will not be available when it is needed. While it could be said that all counterparties are subject to at least a very small level of liquidity risk as credit risk can never be zero, in this document, liquidity risk has been treated as whether or not instant access to cash can be obtained from each form of investment instrument. However, it has to be pointed out that while some forms of investment e.g. gilts, CDs, corporate bonds can usually be sold immediately if the need arises, there are two caveats: - a. cash may not be available until a settlement date up to three days after the sale b. there is an implied assumption that markets will not freeze up and so the instrument in question will find a ready buyer. The column in tables 1.1-1.4 headed as ‘market risk’ will show each investment instrument as being instant access, sale T+3 = transaction date plus 3 business days before you get cash, or term i.e. money is locked in until an agreed maturity date. 3. Market risk: this is the risk that, through adverse market fluctuations in the value of the principal sums an organisation borrows and invests, its stated treasury management policies and objectives are compromised, against which effects it has failed to protect itself adequately. However, some cash rich local authorities may positively want exposure to market risk e.g. those investing in investment instruments with a view to obtaining a long term increase in value. 4. Interest rate risk: this is the risk that fluctuations in the levels of interest rates create an unexpected or unbudgeted burden on the organisation’s finances, against which the organisation has failed to protect itself adequately. This authority has set limits for its fixed and variable rate exposure in its Treasury Indicators in this report (see Section 3.4). 5. Legal and regulatory risk: this is the risk that the organisation itself, or an organisation with which it is dealing in its treasury management activities, fails to act in accordance with its legal powers or regulatory requirements, and that the organisation suffers losses accordingly. Page 147 of 246
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32 Controls on treasury risks 1. Credit and counter-party risk: this authority has set minimum credit criteria to determine which counterparties and countries are of sufficiently high creditworthiness to be considered for investment purposes. See Sections 4.2 and 4.3. 2. Liquidity risk: this authority has a cash flow forecasting model to enable it to determine how long investments can be made for and how much can be invested. 3. Market risk: this authority does not purchase investment instruments which are subject to market risk in terms of fluctuation in their value. 4. Interest rate risk: this authority manages this risk by having a view of the future course of interest rates and then formulating a treasury management strategy accordingly which aims to maximise investment earnings consistent with control of risk or alternatively, seeks to minimise expenditure on interest costs on borrowing. See Section 4.4. 5. Legal and regulatory risk: this authority will not undertake any form of investing until it has ensured that it has all necessary powers and also complied with all regulations. Unlimited investments Regulation 24 states that an investment can be shown in tables 1 / 2 as being ‘unlimited’ in terms of the maximum amount or percentage of the total portfolio that can be put into that type of investment. However, it also requires that an explanation must be given for using that category. The authority has given the following types of investment an unlimited category: - 1. Debt Management Agency Deposit Facility. This is considered to be the lowest risk form of investment available to local authorities as it is operated by the Debt Management Office which is part of H.M. Treasury i.e. the UK Government’s sovereign rating stands behind the DMADF. It is also a deposit account and avoids the complications of buying and holding Government issued treasury bills or gilts. 2. High credit worthiness banks and building societies. See paragraph 4.2 for an explanation of this authority’s definition of high credit worthiness. While an unlimited amount of the investment portfolio may be put into banks and building societies with high credit worthiness, the authority will ensure diversification of its portfolio ensuring that no more than £15 million can be placed with any one institution or group at any one time, other than the Bank of Scotland or Royal Bank of Scotland where the limit is £30 million. Page 148 of 246
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33 Objectives of each type of investment instrument Regulation 25 requires an explanation of the objectives of every type of investment instrument which an authority approves as being ‘permitted’. 1. DEPOSITS The following forms of ‘investments’ are actually more accurately called deposits as cash is deposited in an account until an agreed maturity date or is held at call. a) Debt Management Agency Deposit Facility. This offers the lowest risk form of investment available to local authorities as it is effectively an investment placed with the Government. It is also easy to use as it is a deposit account and avoids the complications of buying and holding Government issued treasury bills or gilts. As it is low risk it also earns low rates of interest. However, it is very useful for authorities whose overriding priority is the avoidance of risk. The longest period for a term deposit with the DMADF is 6 months. b) Term Deposits – Local Authorities. They are quasi-Government bodies with low counterparty and value risk. Typical deposit terms vary from 1 month to 2 years, with longer term deposits offering an opportunity to increase investment returns by locking in high rates ahead of an expected fall in the level of interest rates. At other times, longer term rates can offer good value when the markets incorrectly assess the speed and timing of interest rate increases. This form of investing therefore, offers a lot of flexibility and typically higher earnings than the DMADF. Where it is restricted is that once a longer term investment is made, that cash is locked in until the maturity date other than with agreement of the counterparty, at which point penalties would typically apply. c) Call accounts with high credit worthiness banks and building societies. See Section 4.2 for an explanation of this authority’s definition of high credit worthiness. These typically offer a much higher rate of return than the DMADF and now that measures have been put in place to avoid over reliance on credit ratings, the authority feels much more confident that the residual risks around using such banks and building societies are at a low, reasonable and acceptable level. There is instant access to recalling cash deposited (or short-dated notice e.g. 15-30 days). This generally means accepting a lower rate of interest than that which could be earned from the same institution by making a term deposit (see 1d below). However, there are a number of call accounts which at the time of writing, offer rates 2 – 3 times more than term deposits with the DMADF. Some use of call accounts is highly desirable to ensure that the authority has ready access to cash when needed to pay bills. d) Term deposits with high credit worthiness banks and building societies. The objectives are as for 1c. These offer a much higher rate of return than the DMADF and deposits made with other Local Authorities (dependent upon term) and, similar to 1c, now that measures have been put in place to avoid over reliance on credit ratings, the authority feels much more confident that the residual risks around using such banks and building societies are at a low, reasonable and acceptable level. This is the most widely used form of investing used by local authorities. The authority will ensure diversification of its portfolio of deposits ensuring that no more than £15 million is invested with any (non-nationalised) UK counterparty, and no more than £15 million is invested with any other non-UK counterparty, group or country. In addition, longer term deposits offer an opportunity to increase investment returns by locking in high rates ahead of an expected fall in the level of interest rates. At other times, longer term rates can offer good value when the markets incorrectly assess the speed and timing of interest rate increases. This form of investing therefore, offers a lot of flexibility and higher earnings than the DMADF. Where it is restricted is that once a longer term investment is made, that cash is locked in until the maturity date. e) Fixed term deposits with variable rate and variable maturities (structured deposits). This encompasses ALL types of structured deposits. There has been considerable change in the types of structured deposits brought to the market over the last few years, some of which are already no longer available. In view of the fluidity of Page 149 of 246
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34 this area, this is a generic title for all structured deposits so as to provide councils with greater flexibility to adopt new instruments as and when they are brought to the market. This line encompasses ALL types of structured deposits. There has been considerable change in the types of structured deposits brought to the market over the last few years, some of which are already no longer available. In view of the fluidity of this area, this is a generic title for all structured deposits so as to provide greater flexibility to adopt new instruments as and when they are brought to the market. 2. DEPOSITS WITH COUNTERPARTIES CURRENTLY IN RECEIPT OF UK GOVERNMENT SUPPORT / OWNERSHIP These banks offer another dimension of creditworthiness in terms of UK Government backing through either direct (partial or full) ownership. The view of this authority is that such backing makes these banks attractive institutions with whom to place deposits, and that will remain our view if the UK sovereign rating were to be downgraded in the coming year. a. Call accounts. As for 1c. but UK Government stated support implies that the UK Government stands behind these banks and building societies and will be deeply committed to providing whatever support that may be required to ensure the continuity of such institutions. This authority feels this indicates a low and acceptable level of residual risk. b. Term deposits with high credit worthiness banks which are fully or semi nationalised. As for 1d. but Government ownership partial or full implies that the UK Government stands behind this bank and will be deeply committed to providing whatever support that may be required to ensure the continuity of that bank. This authority considers this indicates a low and acceptable level of residual risk. c. Fixed term deposits with variable rate and variable maturities (structured deposits). As for 1e but UK Government stated support implies that the UK Government stands behind eligible banks and building societies and will be deeply committed to providing whatever support that may be required to ensure the continuity of such institutions. This authority feels this indicates a low and acceptable level of residual risk. This line encompasses ALL types of structured deposits. There has been considerable change in the types of structured deposits brought to the market over the last few years, some of which are already no longer available. In view of the fluidity of this area, this is a generic title for all structured deposits so as to provide greater flexibility to adopt new instruments as and when they are brought to the market. Page 150 of 246
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35 3. COLLECTIVE INVESTMENT SCHEMES STRUCTURED AS OPEN ENDED INVESTMENT COMPANIES (OEICS) a. Government liquidity funds. These are the same as money market funds (see below) but only invest in government debt issuance with highly rated governments. Due to the higher quality of underlying investments, they offer a lower rate of return than MMFs. However, their net return is typically on a par with the DMADF, but with instant access. b. Money Market Funds (MMFs). By definition, MMFs are AAA rated and are widely diversified, using many forms of money market securities including types which this authority does not currently have the expertise or capabilities to hold directly. However, due to the high level of expertise of the fund managers and the huge amounts of money invested in MMFs, and the fact that the weighted average maturity (WAM) cannot exceed 60 days, MMFs offer a combination of high security, instant access to funds, high diversification and good rates of return compared to equivalent instant access facilities. They are particularly advantageous in falling interest rate environments as their 60 day WAM means they have locked in investments earning higher rates of interest than are currently available in the market. MMFs also help an authority to diversify its own portfolio as e.g. a £2m investment placed directly with HSBC is a 100% risk exposure to HSBC whereas £2m invested in a MMF may end up with say £10,000 being invested with HSBC through the MMF. For authorities particularly concerned with risk exposure to banks, MMFs offer an effective way of minimising risk exposure while still getting much better rates of return than available through the DMADF. c. Ultra Short Dated Bond Funds . These funds are similar to MMFs, can still be AAA rated but have Variable Net Asset Values (VNAV) as opposed to a traditional MMF which has a Constant Net Asset Value (CNAV). They aim to achieve a higher yield and to do this either take more credit risk or invest out for longer periods of time, which means they are more volatile. These funds can have WAM’s and Weighted Average Life (WAL’s) of 90 – 365 days or even longer. Their primary objective is yield and capital preservation is second. They therefore are a higher risk than MMFs and correspondingly have the potential to earn higher returns than MMFs. d. Gilt funds. These are funds which invest only in U.K. Government gilts. They offer a lower rate of return than bond funds but are highly rated both as a fund and through investing only in highly rated government securities. They offer a higher rate of return than investing in the DMADF but they do have an exposure to movements in market prices of assets held. e. Bond funds. These can invest in both government and corporate bonds. This therefore entails a higher level of risk exposure than gilt funds and the aim is to achieve a higher rate of return than normally available from gilt funds by trading in non- government bonds. Page 151 of 246
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36 4. SECURITIES ISSUED OR GUARANTEED BY GOVERNMENTS The following types of investments are where an authority directly purchases a particular investment instrument, a security, i.e. it has a market price when purchased and that value can change during the period the instrument is held until it matures or is sold. The annual earnings on a security is called a yield i.e. it is normally the interest paid by the issuer divided by the price you paid to purchase the security unless a security is initially issued at a discount e.g. treasury bills.. a. Treasury bills. These are short term bills (up to 12 months, although none have ever been issued for this maturity) issued by the Government and so are backed by the sovereign rating of the UK. The yield is higher than the rate of interest paid by the DMADF and another advantage compared to a time deposit in the DMADF is that they can be sold if there is a need for access to cash at any point in time. However, there is a spread between purchase and sale prices so early sales could incur a net cost during the period of ownership. b. Gilts. These are longer term debt issuance by the UK Government and are backed by the sovereign rating of the UK. The yield is higher than the rate of interest paid by the DMADF and another advantage compared to a time deposit in the DMADF is that they can be sold if there is a need for access to cash at any point in time. However, there is a spread between purchase and sale prices so early sales may incur a net cost. Market movements that occur between purchase and sale may also have an adverse impact on proceeds. The advantage over Treasury bills is that they generally offer higher yields the longer it is to maturity (for most periods) if the yield curve is positive. c. Bond issuance issued by a financial institution which is explicitly guaranteed by the UK Government e.g. National Rail. This is similar to a gilt due to the explicit Government guarantee. d. Sovereign bond issues (other than the UK govt) denominated in Sterling. As for gilts but issued by other nations. Use limited to issues of nations with at least the same sovereign rating as for the UK. e. Bonds issued by Multi Lateral Development Banks (MLDBs). These are similar to c. and e. above but are issued by MLDBs which are typically guaranteed by a group of sovereign states e.g. European Bank for Reconstruction and Development. 5. SECURITIES ISSUED BY CORPORATE ORGANISATIONS The following types of investments are where an authority directly purchases a particular investment instrument, a security, i.e. it has a market price when purchased and that value can change during the period the instrument is held until it is sold. The annual earnings on a security is called a yield i.e. is the interest paid by the issuer divided by the price you paid to purchase the security. These are similar to the previous category but corporate organisations can have a wide variety of credit worthiness so it is essential for local authorities to only select the organisations with the highest levels of credit worthiness. Corporate securities are generally a higher risk than government debt issuance and so earn higher yields. a. Certificates of deposit (CDs). These are shorter term securities issued by deposit taking institutions (mainly financial institutions). They are negotiable instruments, so can be sold ahead of maturity and also purchased after they have been issued. However, that liquidity can come at a price, where the yield could be marginally less than placing a deposit with the same bank as the issuing bank. b. Commercial paper. This is similar to CDs but is issued by commercial organisations or other entities. Maturity periods are up to 365 days but commonly 90 days. Page 152 of 246
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37 c. Corporate bonds. These are (long term) bonds (usually bearing a fixed rate of interest) issued by a financial institution, company or other non-government issuer in order to raise capital for the institution as an alternative to issuing shares or borrowing from banks. They are generally seen to be of a lower creditworthiness than government issued debt and so usually offer higher rates of yield. d. Floating rate notes. These are bonds on which the rate of interest is established periodically with reference to short-term interest rates. 6. OTHER a. Local Authority Mortgage Scheme. Authorities who are participating in the Local Authority Mortgage Guarantee Scheme (LAMS) may be required to place a deposit with the mortgage provider(s) up to the full value of the guarantee. The deposit will be in place for the term of the guarantee i.e. 5 years (with the possibility of a further 2 year extension if the account is 90+ days in arrears at the end of the initial 5 years) - and may have conditions / structures attached. The mortgage provider will not hold a legal charge over the deposit. b. Loans to third parties – This would involve the Council borrowing from the PWLB/markets and onward lending to Registered Social Landlords to enable them to access lower cost loans and kickstart developments of affordable mid-market homes. The risk associated with such an investment would be mitigated by an assessment of the counterparty in advance of any loan being granted and through the application of a premium on the loan rate. Interest would be paid by the RSL over the term of the loan, with repayment of principal upon the earlier of 10/20 years or at the point of house sales. The Council will also request that a standard security is taken over the property which would allow the Council to require the sale of the homes to another landlord, providing greater risk mitigation. c. Subordinated Debt Subscription to the SPV set up to deliver the Newbattle Centre project – this involved the Council subscribing £332,806 of subordinated debt to the SPV that was set up to deliver the Newbattle Centre project (2 year construction and 25 year operational contract length). The length of the investment is 25 years with the subscription made at operation commencement of the contract. The repayment profile will comprise 81% of the principal remaining invested until the final two years of the contract. The risk associated with this type of investment will be mitigated through an annual assessment as a minimum to review the holding of such debt, and whether the exposure to risk arising from the investment has changed over the period. d. ESCO: Midlothian Energy Limited (MEL) Joint Venture between Midlothian Council and Vattenfall to deliver energy supply to Shawfair using heat supplied from the Millerhill Energy from Waste plant and related projects. Page 153 of 246
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38 Table 1: Permitted Investments 1.1 Deposits Investment Category Minimum Credit Criteria Liquidity risk Market risk Max %/£m of total investments Max. maturity period Max Transaction Value Debt Management Agency Deposit Facility UK Government Term No 100% 6 months n/a Term deposits – local authorities Quasi-UK Government Term No 100% 5 years £15m Call accounts – banks and building societies Green Instant No 100% 1 day £15m Term deposits / Notice Accounts – banks and building societies Yellow Purple Blue Orange Red Green No Colour Term No 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use £15m Fixed term deposits with variable rate and variable maturities: - Structured deposits Yellow Purple Blue Orange Red Green No Colour Term No 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use £15m 1.2 Deposits with counterparties currently in receipt of government support / ownership Investment Category Minimum Credit Criteria Liquidity risk Market risk Max %/£m of total investments Max. maturity period Max Transaction Value UK nationalised banks – Call accounts Blue Instant No 100% 1 day £30m UK nationalised banks – Term Deposits / Notice Accounts Blue Term No 100% 2 years £30m UK nationalised banks – Fixed term deposits with variable rate and variable maturities: - Structured deposits Blue Term No 100% 2 years £30m Non-UK (high sovereign rated country) nationalised banks – Call accounts Green Instant No 100% 1 day £15m Non-UK (high sovereign rated country) nationalised banks:- Term Deposits / Notice Accounts Yellow Purple Blue Orange Red Green No Colour Term No 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use £15m Non-UK (high sovereign rated country) nationalised banks:- Fixed term deposits with variable rate and variable maturities: - Structured deposits Yellow Purple Blue Orange Red Green No Colour Term No 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use £15m If forward deposits are made, the forward period plus the deal period equate to the maximum maturity period. Page 154 of 246
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39 1.3 Collective investment schemes structured as Open Ended Investment Companies (OEICs) Investment Category Minimum Credit Criteria Liquidity risk Market risk Max %/£m of total investments Max. maturity period Max Transaction Value Government Liquidity Funds AAA Instant No 100% 1 day £15m Money Market Funds CNAV AAA Instant No 100% 1 day £15m Money Market Funds LVNAV AAA Instant No 100% 1 day £15m Money Market Funds VNAV AAA Instant No 100% 1 day £15m Ultra Short Dated Bond Funds with a credit score of 1.25 AAA T+1 to T+5 Yes 100% 1 week £15m Ultra Short Dated Bond Funds with a credit score of 1.5 AAA T+1 to T+5 Yes 100% 1 week £15m Bond Funds AAA T+2 or longer Yes 50% 2 days £15m Gilt Funds AAA T+2 or longer Yes 50% 2 days £15m 1.4 Securities issued or guaranteed by governments Investment Category * Minimum Credit Criteria Liquidity risk Market risk Max %?£m of total investments Max. maturity period Treasury Bills UK sovereign rating Sale T+1 Yes 100% 6 months UK Government Gilts UK sovereign rating Sale T+1 Yes 100% 50 years Bond issuance issued by a financial institution which is explicitly guaranteed by the UK Government e.g. National Rail UK sovereign rating Sale T+3 Yes 100% 50 years Sovereign bond issues (other than the UK govt) AAA (or state your criteria if different) Sale T+1 Yes 100% 50 years Bonds issued by multilateral development banks AAA (or state your criteria if different) Sale T+1 Yes 100% 50 years Page 155 of 246
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40 1.5 Securities issued by corporate organisations Investment Category * Minimum Credit Criteria Liquidity risk Market risk Max % of total investments Max. maturity period Max Transaction Value Certificates of deposit issued by banks and building societies Yellow Purple Blue Orange Red Green No Colour Sale T+1 Yes 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use £15m Commercial paper other Yellow Purple Blue Orange Red Green No Colour Sale T+0 Yes 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use £15m Floating rate notes Yellow Purple Blue Orange Red Green No Colour Sale T+2 Yes 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use £15m Corporate Bonds other Yellow Purple Blue Orange Red Green No Colour Sale T+2 Yes 100% Up to 6 yrs Up to 2.5 yrs Up to 1.25 yrs Up to 1.25 yrs Up to 7 mths Up to 120 days Not for use £15m 1.6 Other Investment Category Minimum Credit Criteria Liquidity risk Market risk Max %/£m of total investments Max. maturity period Local authority mortgage guarantee scheme. Blue Term No 50% 5 years Loans to Third Parties n/a Term No £25m 20 years Subordinated Debt Subscription to Newbattle Centre SPV n/a Term No £0.326m 22 years ESCO n/a Term No £10.2m n/a Page 156 of 246
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41 5.8 APPENDIX: Treasury Management Practice (TMP1) – Credit and Counterparty Risk Management Midlothian Council Permitted Investments, Associated Controls and Limits Type of Investment Treasury Risks Mitigating Controls Council Limits Cash type instruments a. Deposits with the Debt Management Account Facility (UK Government) (Very low risk) This is a deposit with the UK Government and as such counterparty and liquidity risk is very low, and there is no risk to value. Deposits can be between overnight and 6 months. Little mitigating controls required. As this is a UK Government investment the monetary limit is unlimited to allow for a safe haven for investments. As shown in Appendix 5.2. b. Deposits with other local authorities or public bodies (Very low risk) These are considered quasi UK Government debt and as such counterparty risk is very low, and there is no risk to value. Deposits can only be broken with the agreement of the counterparty, and penalties can apply. Deposits with other non-local authority bodies will be restricted to the overall credit rating criteria. Little mitigating controls required for local authority deposits, as this is a quasi UK Government investment. Non- local authority deposits will follow the approved credit rating criteria. As shown in Appendix 5.2. c. CNAV, LVNAV and VNAV Money Market Funds (MMFs) (Low to very low risk) Pooled cash investment vehicle which provides very low counterparty, liquidity and market risk. These will primarily be used as liquidity instruments. Funds will only be used where the MMF has a “AAA” rated status from either Fitch, Moody’s or Standard & Poors. As shown in Appendix 5.2. d. Ultra Short Dated Bond Funds (low risk) Pooled cash investment vehicle which provides very low counterparty, liquidity and market risk. These will primarily be used as liquidity instruments. Funds will only be used where the Ultra Short Dated Bond Fund has a “AAA” rated status from either Fitch, Moody’s or Standard and Poor’s. As shown in Appendix 5.2. Page 157 of 246
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42 Type of Investment Treasury Risks Mitigating Controls Council Limits e. Call account deposit accounts with financial institutions (banks and building societies) (Low risk depending on credit rating) These tend to be low risk investments, but will exhibit higher risks than categories (a), (b) and (c) above. Whilst there is no risk to value with these types of investments, liquidity is high and investments can be returned at short notice. The counterparty selection criteria approved above restricts lending only to high quality counterparties, measured primarily by credit ratings from Fitch, Moody’s and Standard and Poor’s, with the credit scoring methodology by MUFG Corporate Markets overlaid. On day to day investment dealing with this criteria will be further strengthened by the use of additional market intelligence. As shown in Appendix 5.2. f. Term deposits with financial institutions (banks and building societies) (Low to medium risk depending on period & credit rating) These tend to be low risk investments, but will exhibit higher risks than categories (a), (b), (c) and (d) above. Whilst there is no risk to value with these types of investments, liquidity is low and term deposits can only be broken with the agreement of the counterparty, and penalties may apply. The counterparty selection criteria approved above restricts lending only to high quality counterparties, measured primarily by credit ratings from Fitch, Moody’s and Standard and Poor’s, with the credit scoring methodology by MUFG Corporate Markets overlaid. On day to day investment dealing, this criteria will be further strengthened by the use of additional market intelligence. As shown in Appendix 5.2. Page 158 of 246
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43 Type of Investment Treasury Risks Mitigating Controls Council Limits g. Government Gilts and Treasury Bills (Very low risk) These are marketable securities issued by the UK Government and as such counterparty and liquidity risk is very low, although there is potential risk to value arising from an adverse movement in interest rates (no loss if these are held to maturity. Little counterparty mitigating controls are required, as this is a UK Government investment. The potential for capital loss will be reduced by limiting the maximum monetary and time exposures As shown in Appendix 5.2. h. Certificates of deposits with financial institutions (Low risk) These are short dated marketable securities issued by financial institutions and as such counterparty risk is low, but will exhibit higher risks than categories (a), (b) and (c) above. There is risk to value of capital loss arising from selling ahead of maturity if combined with an adverse movement in interest rates (no loss if these are held to maturity). Liquidity risk will normally be low. The counterparty selection criteria approved above restricts lending only to high quality counterparties, measured primarily by credit ratings from Fitch, Moody’s and Standard and Poor’s. The selection defaults to the lowest available colour band / credit rating to provide additional risk control measures. Day to day investment dealing with this criteria will be further strengthened by the use of additional market intelligence. As shown in Appendix 5.2. i. Structured deposit facilities with banks and building societies (escalating rates, de-escalating rates etc.) (Low to medium risk depending on period & credit rating) These tend to be medium to low risk investments, but will exhibit higher risks than categories (a), (b), (c) and (d) above. Whilst there is no risk to value with these types of investments, liquidity is very low and investments can only be broken with the agreement of the counterparty (penalties may apply). The counterparty selection criteria approved above restricts lending only to high quality counterparties, measured primarily by credit ratings from Fitch, Moody’s and Standard and Poor’s, with the credit scoring methodology by MUFG Corporate Markets overlaid. On day to day investment dealing, this criteria will be further strengthened by the use of additional market intelligence. As shown in Appendix 5.2. Page 159 of 246
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44 Type of Investment Treasury Risks Mitigating Controls Council Limits j. Corporate bonds (Medium to high risk depending on period & credit rating) These are marketable securities issued by financial and corporate institutions. Counterparty risk will vary and there is risk to value of capital loss arising from selling ahead of maturity if combined with an adverse movement in interest rates. Liquidity risk will be low. The counterparty selection criteria approved above restricts lending only to high quality counterparties, measured primarily by credit ratings from Fitch, Moody’s and Standard and Poor’s. The selection defaults to the lowest available colour band / credit rating to provide additional risk control measures. Corporate bonds will be restricted to those meeting the base criteria. Day to day investment dealing with this criteria will be further strengthened by the use of additional market intelligence. As shown in Appendix 5.2. Page 160 of 246
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45 Type of Investment Treasury Risks Mitigating Controls Council Limits Other types of investments k. Loans to third parties Using the example of a loan to a RSL, these would be medium risk investments, exhibiting higher risks than categories (a)-(f) above. They are also highly illiquid and are only repaid at the end of a defined period of time (up to 20 years) or on the sale of a property, whichever is the earlier. The risk associated with such an investment would be mitigated through the application of a premium on the loan rate. The Council will also request that a standard security is taken over the property which would allow the Council to require the sale of the homes to another landlord, providing greater risk mitigation. £25m l. Non-local authority shareholdings These are non-service investments which may exhibit market risk, be only considered for longer term investments and will be likely to be liquid. Any non-service equity investment will require separate Member approval and each application will be supported by the service rational behind the investment and the likelihood of loss. Per Existing m. Local Authority Mortgage Scheme (LAMS) These are service investments at market rates of interest plus a premium. As shown in Appendix 5.2. n. Subordinated Debt Subscription to Newbattle Centre SPV These are investments that are exposed to the success or failure of individual projects and are highly illiquid. The Council and Scottish Government (via the SFT) are participants in and party to the governance and controls within the project structure. As such they are well placed to influence and ensure the successful completion of the project’s term. As shown in Appendix 5.2. o. ESCO These are investments that are exposed to the success or failure of individual projects and are highly illiquid. The Council is in a joint venture partnership and therefore party to the governance and controls within the project structure. As such the Council is As shown in Appendix 5.2. Page 161 of 246
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46 well placed to influence and ensure the successful completion of the project’s term The Monitoring of Deposit Counterparties - The status of counterparties will be monitored regularly. The Council receives credit rating and market information from MUFG Corporate Markets, including when ratings change, and counterparties are checked promptly. On occasion ratings may be downgraded when an investment has already been made. The criteria used are such that a minor downgrading should not affect the full receipt of the principal and interest. Any counterparty failing to meet the criteria will be removed from the list immediately by the Chief Financial Officer & Section 95 Officer, and if required new counterparties which meet the criteria will be added to the list. Page 162 of 246
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5.9 APPENDIX: Approved countries for investments Based on the lowest available rating as at 30.01.2026 AAA • Australia • Denmark • Germany • Netherlands • Norway • Singapore • Sweden • Switzerland AA+ • Canada • U.S.A. AA • Abu Dhabi (UAE) • Finland AA- • U.K. A+ • Belgium • France Page 163 of 246
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48 5.10 APPENDIX: Treasury management scheme of delegation (i) Full Council • receiving and reviewing reports on treasury management policies, practices and activities; • approval of annual strategy. • approval of/amendments to the organisation’s adopted clauses, treasury management policy statement and treasury management practices; • budget consideration and approval; • approval of the division of responsibilities; • receiving and reviewing regular monitoring reports and acting on recommendations; • approving the selection of external service providers and agreeing terms of appointment. (iii) Audit Committee • reviewing treasury management reports, the treasury management policy and procedures, and making recommendations to the responsible body. Page 164 of 246
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49 5.11 APPENDIX: The treasury management role of the section 95 officer The S95 (responsible) officer • recommending clauses, treasury management policy/practices for approval, reviewing the same regularly, and monitoring compliance; • submitting regular treasury management policy reports; • submitting budgets and budget variations; • receiving and reviewing management information reports; • reviewing the performance of the treasury management function; • ensuring the adequacy of treasury management resources and skills, and the effective division of responsibilities within the treasury management function; • ensuring the adequacy of internal audit, and liaising with external audit; • recommending the appointment of external service providers; • preparation of a capital strategy to include capital expenditure, capital financing, non-financial investments and treasury management, with a long term timeframe; • ensuring that the capital strategy is prudent, sustainable, affordable and prudent in the long term and provides value for money; • ensuring that due diligence has been carried out on all treasury and non-financial investments and is in accordance with the risk appetite of the authority; • ensure that the authority has appropriate legal powers to undertake expenditure on non-financial assets and their financing; • ensuring the proportionality of all investments so that the authority does not undertake a level of investing which exposes the authority to an excessive level of risk compared to its financial resources; • ensuring that an adequate governance process is in place for the approval, monitoring and ongoing risk management of all non-financial investments and long term liabilities; • provision to members of a schedule of all non-treasury investments including material investments in subsidiaries, joint ventures, loans and financial guarantees ensuring that members are adequately informed and understand the risk exposures taken on by an authority; • ensuring that the authority has adequate expertise, either in house or externally provided, to carry out the above; • creation of Treasury Management Practices which specifically deal with how non- treasury investments will be carried out and managed, to include the following:- o Risk management (TMP1 and schedules), including investment and risk management criteria for any material non-treasury investment portfolios; o Performance measurement and management (TMP2 and schedules), including methodology and criteria for assessing the performance and success of non-treasury investments; o Decision making, governance and organisation (TMP5 and schedules), including a statement of the governance requirements for decision making in relation to non-treasury investments; and arrangements to ensure that appropriate professional due diligence is carried out to support decision making; o Reporting and management information (TMP6 and schedules), including where and how often monitoring reports are taken; Page 165 of 246
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50 o Training and qualifications (TMP10 and schedules), including how the relevant knowledge and skills in relation to non-treasury investments will be arranged. Page 166 of 246
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Audit Committee Monday 23 February 2026 Item No 5.4 Internal Audit Work to January 2026 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 2025/26; 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 2025/26 was approved by the Audit Committee on 24 February 2025. 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 Global Internal Audit Standards (GIAS) including the production of this report to communicate the results of the reviews. Date 11 February 2026 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 167 of 246
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3 Progress Report 3.1 The Internal Audit Annual Plan 2025/26 was approved by the Audit Committee on 24 February 2025. Internal Audit has completed the following work in the period from 14 November 2025 to 31 January 2026 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 Global Internal Audit Standards (GIAS), including the production of this report to communicate the results. 3.3 Internal Audit issued a final assurance report on the following subject: • Direct Payments Self Directed Support. 3.4 An Executive Summary of the final Internal Audit assurance report issued including audit objective conclusions, key findings, recommendations, areas of good practice, 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. 3.5 The Direct Payments Self Directed Support review has been overall categorised as Reasonable Assurance. 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 3.11 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) Completed work to verify the reported figures in the Lock Up Garage Asset Review. b) 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. c) Learning and development during the research stage of new audit areas for all Internal Audit team members and through joining audit forums (Computer Audit Sub-group) and meetings; and d) Monitored publication of Audit Scotland reports. Page 168 of 246
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Recommendations 3.12 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 2025/26: Recs Rating 2025/26 Number of Recs High 1 Medium 6 Low 7 Not Graded 0 Sub-total reported this period 13 Previously reported 60 Total 73 Recommendations agreed with action plan 73 Not agreed; risk accepted 0 Total 73 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 169 of 246
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4.3 Risk The GIAS 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 ethical requirements set out in the GIAS 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 170 of 246
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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 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. Page 171 of 246
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This report has been presented to Senior Management relevant to the areas audited and have agreed the final Internal Audit assurance reports as set out in the relevant Executive Summary within Appendix 1. 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 172 of 246
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Appendix 1: Executive Summary: Direct Payments – Self Directed Support (SDS) Conclusion: Reasonable Assurance Policies and procedures are in place for Direct Payments Self Directed Support (SDS) and guidance is being updated within Adult Health and Social Care. Strength-based assessments have been undertaken and authorisation processes are in place to ensure that Direct Payments are only made for assessed needs and in accordance with an appropriately completed financial assessment. Testing highlighted that Direct Payment Agreements and Local Authority Agreements to Employ a Family Member forms were not on file and Direct Payment care packages were not reviewed on a timely basis. Financial reassessments were not undertaken on a timely basis and financial outcome letters were not sent to service users whose contributions had changed following reassessment. A number of cases were identified where the service user had not received a Direct Payment for a period of time which may be due to the service user not adequately managing their personal budget. Background Under the Social Care (Self-Directed Support) Scotland Act 2013, Self-Directed Support (SDS) options must be offered to all social work service users which include four options: Direct Payment of funds to service users to purchase their own care, service user direction over the use of funds held by a third party, Council selection of and payment for services, or a mix of all three. Direct Payments are local health and social care payments for people with an assessed need who would prefer to arrange and pay for their own care and support. Information is recorded on the case management system, Mosaic and Direct Payments are made through a BACS transfer paid into the service user’s bank account. The Council is currently considering introducing pre-paid cards for service users. Summary of findings & recommendations • Direct Payment agreements formally detailing how the funding will be used and the Local Authority Agreement to Employ a Family Member form were not on file for any of the cases tested. Management will ensure the agreements and forms are completed and held on file by 30 September 2026. • Financial reassessment reviews were not undertaken on a timely basis and financial outcome letters were not issued to service users whose contributions had changed following a financial re-assessment for the cases tested. Management will ensure financial reviews are completed and letters issued by 31 March 2026. • A number of cases were identified where a Direct Payment had not been issued for a period of time. Management have agreed to investigate these cases and establish if any further action is required by 30 September 2026. • Testing highlighted that Direct Payment care package reviews had not always been undertaken when required. There is no regular specific reporting of Direct Payment cases that are due for review. A report on Direct Payment cases due for review will be regularly produced by 30 September 2026 and the completion of reviews managed in accordance with the resources and pressures of the whole service. Recommendation Summary Recommendations Grade High Medium Low Total Current Report - 6 7 13 Prior Report N/A N/A N/A N/A Materiality 314 people were in receipt of Direct Payments (as at August 2025) and the total value of Direct Payments was £1,262,940 (from April to September 2025). The total value of Direct Payments during 2024/25 was £2,610,325. Page 173 of 246
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Headlines Objectives Conclusion Comments 1. Policies and procedures for Self-Directed Support and Direct Payments are in place which comply with legislation and includes local eligibility criteria Reasonable Assurance Policies and procedures are in place for SDS which includes Direct Payments and these are in line with best practice, relevant regulations and legislation. The Council offers all SDS options which are discussed as part of the strength-based assessment. Adult Health and Social Care are in the process of updating the Direct Payments guidance and the update will incorporate the recommendations made within this audit report. There is a lack of Direct Payment operating procedures detailing responsibilities for tasks within each service area which has led to processes not being completed due to a misunderstanding over who is responsible for what. The SDS policy states that reviews should be undertaken in line with the Council’s review policy but the review policy hasn’t been updated since 2011 and there is no review policy on the Internet. The Council’s 2025/26 charging policy was applicable from 1 April 2025 but was not published on the website and intranet until December 2025. 2. Strength-based assessments have been undertaken, and authorisation processes are in place to ensure that Direct Payments are only made for assessed needs and in accordance with an appropriately completed financial assessment. Reasonable Assurance Strength-based assessments are undertaken (for Adult Services and Children’s Services) and proposed support packages are submitted to the Resource Panel for authorisation. It was noted that Adult Health and Social Care used different assessment forms which did not always detail service users outcomes. Direct Payment guidance is currently being updated to ensure there is a consistent practice within Adult Health and Social Care. If a client chooses Direct Payment Option 1, part of the assessment involves the practitioner or the social worker discussing the practicalities of the Direct Payment process such as who is managing the Direct Payment and service users are made aware of the support available however this is not formally recorded on the Mosaic form as part of the assessment. Within the SDS Act 2014, there are provisions for support to be provided by family members under Direct Payments provided the conditions are appropriate. If a user requests for a family member to provide the services of a Personal Assistant (PA), this must be documented on the Direct Payment Agreement and a Local Authority Agreement to Employ a Family Member form should be completed. This is then assessed to determine if the arrangement is suitable From the 15 cases reviewed, 2 cases had a family member employed as a PA but no form had been completed. Financial assessments are completed in accordance with the relevant legislation and guidance. Page 174 of 246
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3. Adequate financial controls and monitoring procedures are in place and regular reviews are undertaken to ensure Direct Payments are used appropriately and only for eligible support. Limited Assurance Direct Payment audit monitoring returns must be completed by service users every quarter to demonstrate that funds provided have been spent appropriately. Checks are undertaken within the Operational Support team and cases are referred to the service manager if inappropriate spend is identified. If sufficient evidence is not received the next payment is withheld. Reminders are sent out every quarter, but this is not always followed up if no evidence is received. It was noted that there are a number of Direct Payment client accounts which have not been paid for a period of time which may be due to the service user not adequately managing their personal budget. Financial reassessments should be undertaken annually to establish whether the service user is required to make a financial contribution. These are not being completed on a timely basis and Financial Assessment Outcome Letters had not been issued for the cases tested following reassessment which required a change to their contribution. There were 475 cases due for reassessment (Nov25) and only 205 had been undertaken (this includes non Direct Payment cases). Audit testing identified 2 cases where small overpayments were paid by the service users due to them not being informed of their updated contributions after reassessment. The Care and Support (Direct Payments) Regulations 2014 set out that the local authority must review Direct Payments initially within 6 months, and thereafter every 12 months This process is managed in accordance with the reviews of all other social work client groups It was noted from the sample testing of 15 cases that 11 reviews scheduled on Mosaic had gone past their review date. A report was requested to identify how many care package reviews in relation to Direct Payments have gone past their review date but this information could not be provided at the time of testing. 4. Service users are receiving appropriate information, support and guidance in managing their Direct Payments and appropriate action is taken to recover any funds that have not been utilised or not utilised for appropriate purposes. Limited Assurance A Direct Payment Agreement formally detailing the terms and conditions, the agreed budget and, how it will be used to meet the identified outcomes and needs of the supported person was not on file for any of the 15 cases sampled. This can result in confusion and disputes over what the funding can be used for. The Council commissions LCIL to support service users who receive a Direct Payment. The support offered from LCIL includes payroll services, helping with money management and maintaining accurate records. A Statement of Rates letter is in place for 2025-26 which details the cost of the service for approximately 95 individuals (circa £20k pa) and that periodic service reviews shall be carried out by the Council and the provider to ensure effective delivery of the service. Testing highlighted a case where LCIL were not sending paperwork to the Operational Support team on a timely basis to enable the quarterly audit checks to be undertaken. Page 175 of 246
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Areas where expected controls are met/good practice No. Areas of Positive Assurance 1. Policies and procedures are in place for Self-Directed Support (SDS) which includes Direct Payments as one of the options and includes the eligibility criteria. These are in line with best practice, relevant regulations and legislation. Information is available on the Council’s website about Self Directed Support including Direct Payments as one of the options which includes information on managing funds. 2. The Council has a ‘charging policy’ for residential and non-residential services which complies with COSLA’s National Strategy and Guidance for Charges Applying to Non-Residential Social Care Services, the National Assistance Act 1948 and the National Assistance (Assessment of Resources) Regulations 1992. 3. Strength based assessments are carried out for all service users (adults services and children services) considering the self-directed support route which involves the client and establishes desired outcomes. All care packages are agreed at the resource panel (separate resource panels for adults and children) and confirms that as part of the assessment undertaken, the eligible person has been offered each of the 4 options. An outcome assessment forum was established within Children’s Services in March 2025 to review the assessments before they go to the resource panel. This also provides a training opportunity for social workers. Children Services use a consistent assessment form and a budget calculator which is currently being reviewed. 4. Service users in receipt of a Direct Payment are required to provide audit monitoring returns every quarter to demonstrate that funds provided have been spent appropriately. No further payments are made if evidence is not submitted and payments are not topped up if the service user has sufficient funds. The service reviews the evidence to determine whether support has been purchased in accordance with the agreed care package. If it is identified that payments have not been used in accordance with the relevant care package, arrangements are made to reclaim the monies. 5 A disability team was established in September 2024 in Children’s Services. The service is improving practice and consistency to ensure families are receiving a fair and equitable response to assessed social work needs. The development of this team supports the Business Transformation Project focused on improving transitions across Education, Children’s Services and Adult Services. The introduction of the team will support better tracking of young people who need support as they move into adulthood. 6 A process is in place to terminate Direct Payments for service users who have passed away and to raise an invoice for any outstanding monies. Page 176 of 246
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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, noncompliance 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 177 of 246
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Audit Committee Monday 23 February 2026 Item No 5.5 Internal Audit Strategy and Annual Plan 2026/27 Report by Chief Internal Auditor Report for Decision 1 Recommendations The Audit Committee is invited to: a) Note the changes to the Internal Audit Strategy outlined in section 4 of this report; b) Note the outline of the Internal Audit planning process outlined in section 5 of this report; c) Approve the Internal Audit Strategy (Appendix 1); and d) Approve the Internal Audit Annual Plan 2026/27 (Appendix 2). 2 Purpose of Report/Executive Summary The purpose of this report is to gain approval from the Audit Committee to the proposed Internal Audit Strategy and Annual Plan 2026/27 to enable the Chief Internal Auditor to prepare annual opinions on the adequacy of the overall control environment for Midlothian Council, and Midlothian Integration Joint Board (MIJB). The Internal Audit Strategy at Appendix 1 outlines the strategic direction for how Internal Audit will achieve its objectives, which are set out in the Internal Audit Charter, in conformance with Global Internal Audit Standards. It guides the Internal Audit function in delivering high quality internal audit services to Midlothian Council and the MIJB. The Internal Audit Annual Plan 2026/27 at Appendix 2 has been developed by the shared Chief Internal Auditor and the Principal Internal Auditor. It sets out the proposed range and breadth of audit activity within the audit programme of work to enable the Chief Internal Auditor to prepare the independent and objective audit opinions for Midlothian Council and the MIJB. A separate Internal Audit Annual Plan 2026/27 for the MIJB will be presented to its Audit and Risk Committee. Key components of the audit planning process include a clear understanding of each organisation’s functions, associated risks, and assurance framework. Date 11 February 2026 Report Contacts Duncan Stainbank, Chief Internal Auditor duncan.stainbank@midlothian.gov.uk Page 179 of 246
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3 Background 3.1 The Local Authority Accounts (Scotland) Regulations 2014 require a local authority to operate a professional and objective internal auditing service. This service must be provided in accordance with recognised standards and practices in relation to internal auditing. Recognised standards and practices are those set out in the Global Internal Audit Standards (GIAS) as adjusted by the UK Public Sector Application note. 3.2 The Midlothian Council Internal Audit function is following the professional standards as set out in the Global Internal Audit Standards (GIAS) as adjusted by the UK Public Sector Application note, from the 1 April 2025, where resources allow. In accordance with GIAS to develop an effective internal audit strategy and plan, the chief audit executive must understand the organization’s governance, risk management, and control processes. 3.3 GIAS also requires that the chief audit executive must develop and implement a strategy for the internal audit function that supports the strategic objectives and success of the organization and aligns with the expectations of the board (the Audit Committee acting on behalf of the Council), senior management, and other key stakeholders, including Audit Scotland and the Midlothian Public. 3.4 Internal Audit resources and services are also provided by Midlothian Council’s Internal Audit team to the Midlothian Health and Social Care Integration Joint Board (MIJB), including the appointed MIJB Chief Internal Auditor. The Internal Audit Charter and Strategy are applicable to each organisation. 4 Internal Audit Strategy 4.1 GIAS Standard 9.2 Internal Audit Strategy states, that; “the chief audit executive must develop and implement a strategy for the internal audit function that supports the strategic objectives and success of the organization and aligns with the expectations of the board, senior management, and other key stakeholders.” 4.2 The Chief Internal Auditor (CAE) and the Principal Internal Auditor have developed the Internal Audit Strategy at Appendix 1. It outlines the strategic direction for how Internal Audit will achieve its objectives, which are set out in the Internal Audit Charter, in conformance with GIAS. It guides the Internal Audit function in delivering high quality internal audit services to Midlothian Council and the Midlothian Health and Social Care Integration Joint Board (MIJB). 4.4 The Internal Audit Strategy: • Outlines the assurance framework, providing clarity of the respective responsibilities of Management for designing and monitoring governance and control systems and of the role of Internal Audit in providing independent assurance thereon; • States how the key themes which are integral to the assurance gathering process across the organisation’s activities will be covered to inform the annual Internal Audit opinion statement; Page 180 of 246
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• Provides focused supporting initiatives to develop continuous improvement in the completion of Internal Audit. • Describes the approach to the development of the risk based Internal Audit annual plan; • Sets out the relative allocation of Internal Audit resources; • Outlines how the Internal Audit programme of work will be delivered to add value; and • Describes the monitoring and reporting of Internal Audit findings from its work and progress with its plans to the relevant organisation’s audit committee/board. 5 Internal Audit Annual Plan 2026/27 5.1 The key standards within the GIAS relating to the Internal Audit Plan is Standard 9.4 Internal Audit Plan, which states the following: The chief audit executive must create an internal audit plan that supports the achievement of the organization’s objectives. The chief audit executive must base the internal audit plan on a documented assessment of the organization’s strategies, objectives, and risks. This assessment must be informed by input from the board and senior management as well as the chief audit executive’s understanding of the organization’s governance, risk management, and control processes. The assessment must be performed at least annually. 5.2 GIAS Standard 9.4 also states that; The internal audit plan must: • Consider the internal audit mandate and the full range of agreed- to internal audit services. • Specify internal audit services that support the evaluation and improvement of the organization’s governance, risk management, and control processes. • Consider coverage of information technology governance, fraud risk, the effectiveness of the organization’s compliance and ethics programs, and other high-risk areas. • Identify the necessary human, financial, and technological resources necessary to complete the plan. • Be dynamic and updated timely in response to changes in the organization’s business, risks operations, programs, systems, controls, and organizational culture. 5.3 GIAS Standard 9.5 Coordination and Reliance states that, “The chief audit executive must coordinate with internal and external providers of assurance services and consider relying upon their work. Coordination of services minimizes duplication of efforts, highlights gaps in coverage of key risks, and enhances the overall value added by providers. If unable to achieve an appropriate level of coordination, the chief audit executive must raise any concerns with senior management and, if necessary, the board.” The audit plan has been developed with coordination and reliance on the work of Audit Scotland as the appointed external auditor, specifically in relation to work on Asset Management and Bets Value. However, Coordination and reliance on other assurance providers including Education Scotland, Care Commission, health and safety inspectorate, has not been possible for the 2026/27 plan. Full compliance with this element of the standards has not been completed as Midlothian Council does not have a full Page 181 of 246
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assurance map, work towards collection of data that will inform an assurance Map will be ongoing through 2026/27. 5.4 The Chief Internal Auditor (CAE) and the Principal Internal Auditor have developed the Internal Audit Annual Plan 2026/27 at Appendix 2, based on the Internal Audit staff resources set out in 6.1. It sets out the proposed range and breadth of audit activity to be undertaken to provide the independent and objective audit opinions to Midlothian Council and the MIJB. 5.5 As part of the Internal Audit planning process, it was necessary to consider each organisation’s priorities, plans, strategies, objectives, risks and mitigating controls, and the internal and external assurances provided to determine the priorities of the Internal Audit activity consistent with the organisation’s goals, as follows: • Analysis was undertaken of Internal Audit work during the past 5 years against the Audit Universe which has been significantly revised and realigned by the Principal Internal Auditor to reflect the current strategic and operational management arrangements and approach to service delivery to ensure appropriate coverage; • The Strategic Risk Profile was checked to confirm coverage on key strategic risks, as reliance is placed on the risk assessments carried out by the Risk Owners taking account of the risk ratings and mitigations; and • The chief internal Auditor completed their own service specific risk assessments where service risk registers were not mature enough to place reliance on. • All members of the CMT have been asked for input and Directors provided specific feedback on the planned areas of activity. • Account was taken of known external audit and inspection activities to avoid duplication of assurance work. 5.6 It is envisaged that 2026/27 will continue to be a year of change for the Council and other partner organisations. Therefore, the Internal Audit Annual Plan 2026/27 should be considered to be flexible and will be periodically reviewed, and amended as required, to reflect any new arrangement or changing risks and priorities or available resources. Any amendments relating to the Council will be brought to the Corporate Management Team and the Audit Committee for approval. 5.7 The Non-MLC days reflect the Council’s partnership working commitment to provide Internal Audit resource and services to the Midlothian Health and Social Care Integration Joint Board (MIJB). A separate Internal Audit Annual Plan 2026/27 will be presented to the MIJB Audit and Risk Committee for approval. Page 182 of 246
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6 Report Implications (Resource, Digital, Risk and Equalities) 6.1 Resource The Local Authority Accounts (Scotland) Regulations 2014 require a local authority to operate a professional and objective internal auditing service. Internal Audit must have sufficient staff and other resources to enable it to carry out the objectives of the Charter and to deliver a programme of independent and objective audit assurance work alongside other available sources of assurance to enable the Chief Audit Executive to prepare annual opinions on the adequacy of the overall control environment for Midlothian Council, and the MIJB. The Internal Audit staff resource totalling 2.61 FTE comprises Service Manager Internal Audit (0.25 FTE the other 0.25 FTE on counter fraud), Principal Internal Auditor (0.36 FTE with the other 0.36FTE on counter fraud) and 2 Auditors (2FTE). Each member of the current Internal Audit team has a professional internal audit or accountancy qualification, and has suitable experience, knowledge, skills and competencies (Including knowledge of GIAS and the Seven Principles of Public Life) needed to deliver the Plan. After deduction for estimated annual leave, public holidays, absence, this equates to a total of 511 days available for Internal Audit activity (2025/26 plan 511 days). 6.2 Digital There are no digital implications arising from this report. 6.3 Risk Key components of the audit planning process include a clear understanding of the Council’s functions, associated risks, and potential range and breadth of audit activity for inclusion within the plan. As in previous years, to capture potential areas of risk and uncertainty more fully, reference has been made to the Strategic Risk Profile and key stakeholders have been consulted to make an appropriate assessment of service level risks. At all times, Management’s responsibilities (led by the Corporate Management Team) include: o Designing and maintaining proper risk management, governance and internal control processes and systems for which they have responsibility to ensure probity in systems and operations, including the prevention, detection and resolution of fraud and irregularities. These are not fixed but evolve as the Council changes. o Checking that these governance arrangements and internal controls are operating effectively and obtaining assurances from internal compliance, risk, inspection, quality, and control functions. (The above are known as the first and second lines.) o Engaging with Internal Audit (the third line) in a positive way to achieve shared goals for robust internal control and governance, Page 183 of 246
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best value and improvement, and ensuring that Internal Audit can properly fulfil its role. o Considering and acting upon Internal Audit findings and recommendations, including implementation of audit recommendations within agreed timescales and updating Pentana performance system, or accepting responsibility for any resultant risk from not doing so. o Seeking advice and consultancy support from Internal Audit on existing controls and on changes to and transformation of governance, processes and procedures. 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 with Global Internal Audit Standards. 6.5 Additional Report Implications (See Appendix A) Page 184 of 246
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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. These objectives have been considered and reviewed against each internal audit assignment within the 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 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 purpose of the internal audit function is to strengthen Midlothian Council’s & Midlothian Integration Joint Board’s ability to create, protect, and sustain best value by providing the Audit Committee and management with independent, risk-based, and objective assurance, advice, insight, and foresight. Page 185 of 246
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A.5 Involving Communities and Other Stakeholders The Chief Audit Executive is accountable to the Audit Committee which, in fulfilling its governance role, acts as a bridge between the Council and other stakeholders. The Audit Committee remit includes “To approve the risk-based internal audit plan, including internal audit’s resources requirements, the approach to using other sources of assurance and any work required to place reliance upon those other sources”. The Council Management Team has been consulted on the Internal Audit resources, risk-based audit approach and the resultant planned Internal Audit coverage to ensure it will provide assurance on controls and governance relating to the key risks facing the Council and to assist them in discharging their roles and responsibilities. External Audit plans have been taken into account in completing the planning process. A.6 Impact on Performance and Outcomes Applying the framework of the GIAS will give the Audit Committee assurance that the Internal Audit function is compliant with legislative requirements and current best practice. The delivery of the Internal Audit strategy and annual plan assists the Council in improving its performance and outcomes. A.7 Adopting a Preventative Approach The Internal Audit Service will continue to annually review compliance with GIAS to ensure that the service is compliant with legislative and regulatory requirements as well as best governance practice in the public sector. Specific audits within the 2026/27 plan will include assessments on when a preventative approach can be adopted by the Council. A.8 Supporting Sustainable Development This report does not relate directly to supporting sustainable development. Internal Audit is a key element of good governance which is important to enable Midlothian Council to achieve its objectives including sustainable outcomes. Page 186 of 246
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INTERNAL AUDIT STRATEGY APPENDIX 1 1. STRATEGIC VISION 1.1. The vision of this strategy is to guide Midlothian Council (MC) Internal Audit function in delivering a high-quality internal audit service to MC and Midlothian Integration Joint Board (MIJB), which is capable of: • providing the statutory annual assurance and audit opinion on the adequacy of each organisation’s risk management, internal control and governance arrangements to the relevant organisation’s senior management and board/audit committee; • carrying out all other objectives contained in Internal Audit’s Charter; and • adding value to each organisation by influencing and offering ways to enhance the governance and internal control environment in alignment to their strategic priorities. 2. STRATEGY OBJECTIVES AND SUPPORTING INITIATIVES 2.1. The objectives of this strategy are to: • Outline the assurance framework which comprises assurances from within the organisation and from external providers of assurance to improve the organisational understanding of the expectations of Internal Audit; • State how the key themes which are integral to the assurance gathering process across the organisation’s activities will be covered to inform the annual audit opinion statement; • Describe the approach to the development of the risk based Internal Audit annual plan; • Set out the relative allocation of Internal Audit resources; • Outline how the Internal Audit programme of work will be delivered to add value and will be prioritised to ensure those areas of greatest risk are covered during the audit year; and • Describe the monitoring and reporting of the Internal Audit findings from its work and progress with its plans to the relevant organisation’s audit committee/board. 2.2 These objectives are underpinned by a suite of supporting initiatives outlining the key steps to drive delivery. The supporting initiatives provide opportunity for Internal Audit staff to develop their competencies, enhance the optimisation of technology, and provide continuous improvement to Midlothian Council and the Midlothian Integration Joint Board and enhance the internal audit offering. They are premised on engaging with all appropriate stakeholders, equipping them to facilitate delivery, empowering them to deliver required outcomes, and embedding good practice. Strategic Objective 1 – Agile Auditing: Innovate to explore a more agile approach to the audit process, building efficiencies and producing more timely feedback to the organisation. Supporting Initiatives: • Engage with internal audit staff and the organisation to understand expectations and importance of timely audit feedback & reporting. • Equip internal auditors to deliver high quality internal audit services through a lean, efficient and effective operating model. • Empower internal auditors to operate in an agile manner. • Embed behaviours that support an agile methodology. Strategic Objective 2 – Optimisation of Standards: Embrace and prioritise conformance and embedding of the Global Internal Audit Standards in the UK Public Sector and maximising their potential to benefit the organisation and the internal audit function. . Supporting Initiatives: • Engage internal audit staff and key stakeholders to ensure a full knowledge and understanding of the GIAS in the UK Public Sector. • Equip internal audit staff and key stakeholders with the tools and information to discharge their respective responsibilities within the GIAS in the UK Public Sector. • Empower internal audit staff and key stakeholders to act on their respective responsibilities and accountabilities within the GIAS in the UK Public Sector. • Embed the mandatory requirement of the GIAS in the UK Public Sector into all relevant policy, process and procedure. Page 187 of 246
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Strategic Objective 3 – Engagement & Reliance on External Assurance Providers: Further engage with the Council and its external Assurance providers to build a better understanding of the levels assurance already in place to avoid duplication of • Engage with internal audit staff in utilising reviews and knowledge to identify all external assurance providers • Equip auditors with the skills identify external assurance providers and assess the appropriateness of assurance provided and governance to ensure visibility and control. and avoid duplication of work. • Empower internal auditors to avoid duplication and place and communicate appropriate assurance provision. • Embed knowledge of external assurance within a growing assurance map for the council. 3. ASSURANCE FRAMEWORK 3.1. It is Management’s responsibility to design and maintain proper risk management, governance and internal control processes and systems to ensure probity in systems and operations, and mitigation of risks, including the prevention, detection and resolution of fraud and irregularities. Management is also responsible for checking that the arrangements and controls are operating effectively and obtaining assurances from internal compliance, risk, inspection, quality, and control functions. These are known as the first and second lines of assurance. Internal Audit, as the third line of assurance, is the review function which will provide independent assurance on the effectiveness of the first and second lines of assurance, challenge current practices, recommend best practice and improvements to lead to a strengthening of the control environment and management of risks, thus assisting the organisation in achieving its objectives. 3.2. The organisation’s assurance framework is the means by which the relevant organisation’s Senior Management and Audit Committee/Board ensures that they are properly informed on the risks of not meeting objectives or delivering appropriate outcomes and that it has adequate assurances on the design and operation of systems in place to mitigate those risks. 3.3. The assurance framework comprises assurances from within the organisation (from Management and compliance functions, and independent and objective assurance from Internal Audit) and from external providers of assurance. Examples of the latter include the Accounts Commission, External Audit (Audit Scotland for MC and MIJB), Education Scotland, Care Inspectorate, Scottish Housing Regulator, and other regulators. 3.4. The assurances are considered during the annual review of the effectiveness of each organisation’s overall governance framework carried out by officers of each organisation and supported by Internal Audit. The output is the Annual Governance Statement which is included within the relevant organisation’s Annual Report and Accounts. 3.5. Where audit assurance is required on services that are delivered jointly by public sector joint working arrangements which include the organisation as a partner, these assurances will be sought as appropriate from partners’ Internal Audit service providers, when these exist and Management. 4. KEY THEMES INTEGRAL TO INTERNAL AUDIT ASSURANCE 4.1. Each organisation 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, and used economically, efficiently and effectively. Fundamentally corporate governance is about the systems and processes, and cultures and values that are used by the organisation to discharge those responsibilities in a timely, inclusive, open, honest and accountable manner. This includes: setting the strategic direction, vision, culture and values of the organisation; 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 managing risks. 4.2. The organisation’s statutory financial officer, Section 95 Officer or equivalent, i.e. Chief Financial Officer (MC) and Chief Finance Officer (MIJB), is responsible for the proper administration of the organisation’s financial affairs. Under their direction, the organisation’s system of internal financial control is based on a framework of Financial Regulations (rules and regulations for financial management or administration arrangements linked to other key financial documents that set out the policy framework, associated strategy, and the more detailed procedures and guidelines), regular Management Information, administrative procedures (including segregation of duties), Management Supervision, and a system of Delegation and Accountability. Page 188 of 246
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4.3. The continued use of and investment in technology to support service delivery, and digital change and transformation to improve operations is a key part of the vision for each organisation. Arrangements in place are underpinned by the overarching framework of the ICT security policy designed to ensure that computer systems are secure, reliable and conform to nationally agreed standards, and by the Digital Strategy linked to Corporate Priorities designed to support effective and modern service delivery and to meet service objectives. 5. APPROACH TO PERIODIC PLANNING 5.1. The Internal Audit Strategy and the Internal Audit Annual Plan 2026/27 has been prepared in conformance with the Global Internal Audit Standards to fulfil the requirement to produce the statutory annual assurance and audit opinion for each organisation. 5.2. As part of the Internal Audit planning process, it was necessary to consider each organisation’s priorities, plans, strategies, objectives, risks and mitigating controls, and the internal and external assurances provided to determine the priorities of the Internal Audit activity consistent with the organisation’s goals, as follows: • Analysis was undertaken of Internal Audit work during the past 5 years against the Audit Universe, which reflects the current strategic and operational management arrangements and approach to service delivery, to ensure appropriate coverage; • The Council and service risk registers have been reviewed to confirm coverage on key risks, as reliance is placed on the risk assessments carried out by the Risk Owners taking account of the risk ratings and mitigations; • Account was taken of known external audit and inspection activities to avoid duplication of assurance work; however this may fall short of the level of co-ordination required under GIAS standard 9.5 Coordination and Reliance, as clear plans on 2026/27 planned activity have not been collected from all external assurance providers for the Council. 5.3. The audit planning process involves consultation with key stakeholders including discussions with Senior Management of each organisation to capture potential areas of risk and uncertainty more fully. This is of particular importance during a period of change and transformation as each organisation responds to new legislation or service delivery arrangements that might affect plans, priorities and resources. 6. ALLOCATION OF INTERNAL AUDIT RESOURCES 6.1. The current Internal Audit staff resource totalling 2.61 FTE comprises Service Manager Internal Audit (0.25 FTE the other 0.25 FTE on counter fraud), Principal Internal Auditor (0.36 FTE with the other 0.36FTE on counter fraud) and 2 Auditors (2FTE). Each member of the Internal Audit team has suitable experience, knowledge, skills and competencies (such as the training on the requirements of GIAS and the Seven Principles of Public Life) needed to deliver the plan all of the team have a professional internal audit or accountancy qualification. The Available Days has been amended to reflect the Internal Audit resources after consideration of estimated annual leave, public holidays, absence, learning and development (including required professional CPD), management and supervision. 6.2. It is estimated that around 73% of Available Days will be spent on assurance, and legislative and other compliance activities combined. The Assurance work includes sufficient work across a range and breadth of audit areas which assure those processes that are currently in place and which Management rely on to deliver services, and to enable preparation of the required annual audit opinion on the adequacy of the organisation’s control environment as well as delivery of the Councils Annual Governance Statement and review of previous years work. 6.3. An estimate of 19% of Available Days will be spent on other activities in support of the Internal Audit function, the Audit Committee and wider management of the Council in meeting wider objectives as set out in the Internal Audit Charter. 6.4. An estimate of around 2% of Available Days will be utilised on Consultancy activities which support Management in delivering innovation, change and transformation. Management seek this value added activity during this period of change for Local Government though this allocation reflects a reasonable estimate of what is actually deliverable within the boundaries of the role of Internal Audit and the resources available. 6.5. It is estimated that around 6% of Available Days will be spent on the provision of Internal Audit services to Midlothian Integration Joint Board (MIJB). This reflects MC’s contribution of support resources as governance arrangements have changed in response to statutory partnership working for the provision of health and social care integration. Page 189 of 246
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7. APPROACH TO DELIVERY OF PROGRAMME OF WORK 7.1. To facilitate operational delivery, an Internal Audit Programme of Work will be developed which provides an indication of when work will be scheduled during the year, taking account of discussions with Senior Management and the availability of Internal Audit resources. 7.2. For each Internal Audit, in line with recognised good practice, an Audit Assignment detailing the scope, objectives and timing will be prepared and agreed with the relevant Head of Service(s) and Service Manager(s) prior to commencement of Internal Audit fieldwork. Within assurance work: • The organisation’s Code of Corporate Governance (ELLC/MIJB) will be used by Internal Audit as an integrated toolkit to test the extent of compliance. • End to end reviews of financial management and administration processes will be undertaken by Internal Audit to test the extent of compliance (as integral part of protecting public finances, safeguarding assets, and delivering services effectively and sustainably), and substantive testing of transactions including data analytics will be carried out where this is possible to ensure completeness and accuracy. • The Plans (Financial and Asset Management) to deliver the organisation’s strategies, plans and priorities will be reviewed against best practice standards. • Internal Audit will consider fraud risk and prevention and detection controls, and other appropriate cross- cutting risks and controls (such as risk management, performance management, community engagement, equalities, business continuity, and health and safety), highlight examples of effective internal controls, and share good practice across service areas. • The ICT arrangements in place to protect each organisation from attack in relation to data security, integrity and availability will be tested and ICT Plans will be reviewed to confirm they support delivery of the organisation’s strategies and priorities. • National reports that give rise to introducing best practice arrangements or lessons learned from other local authorities or other public sector bodies will be considered and applied by Internal Audit to influence and offer ways to enhance governance and internal controls. 7.3. The Legislative and Other Compliance work will include testing in accordance with the terms of the funders’ service level agreements or legislative requirements, as part of the wider assurance framework. 7.4. Within Advisory activities, Internal Audit will add value to the Council as it transforms its service delivery models, re-designs its business processes, and utilises technology to automate processes by influencing and offering ways to ensure adequate governance, risk management and internal controls. Internal Audit in its ‘critical friend’ role will provide an independent view and challenge of a sample of programmes and projects, and an objective assessment of self-evaluation arrangements and improvement that underpin the provision of Best Value, when resources allow. 7.5. Other work will include: • Carrying out Follow-Up to monitor Management’s progress with implementation of Audit recommendations to: ensure that improvement actions have been timeously and effectively implemented; check that these have had the desired effect to manage identified risks; and demonstrate continuous improvement in internal control and governance; and • Performing Contingency advisory reviews on specific instruction from Members or Senior Management, investigations and review of sufficiently important issues highlighted during the year where resources allow. 8. MONITORING THE WORK OF INTERNAL AUDIT 8.1. The Global Internal Audit Standards (GIAS) requires periodic reporting on the Internal Audit activity to the relevant organisation’s Senior Management and Audit Committee/Board. 8.2. Internal Audit assurance work completed and work in progress, and consultancy and other work for the Council associated with the delivery of the Plan will be outlined within regular reports to its Audit Committee. Specifically relating to Internal Audit assurance work, this report will include an Executive Summary of the audit objective, good practice, findings, recommendations, and audit opinion of assurance for each Final Internal Audit Report issued to relevant Senior Management in the period. Page 190 of 246
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8.3. Regular progress updates on implementation by Management of relevant Audit recommendations will be reported periodically during the year to the relevant organisation’s Senior Management and Audit Committee/Board. 8.4. Internal Audit’s compliance with its Strategy, delivery of its risk-based Annual Plan, and outcomes of assessment(s) against GIAS will be considered by the Chief Internal Auditor on a regular basis and formally reported annually to the Council’s Corporate Management Team and the Audit Committee, through the Annual Assurance Report. 8.5. The Internal Audit Annual Assurance Report for each organisation (Midlothian Council and MIJB) to their respective Senior Management and Audit Committee/Board will provide the statutory annual audit opinion on the levels of assurance based on Internal Audit findings over the year to inform each organisation’s Annual Governance Statement. 8.6. The GIAS requires an annual Internal Self-Assessment and an External Quality Assessment (EQA) each five years by appropriately qualified and independent reviewers to assess conformance with the Global Internal Audit Standards, as well as performance measurement to assess the internal audit function’s progress toward the achievement of its objectives and promotion of continuous improvement. The program also will assess, if applicable, compliance with laws and/or regulations relevant to internal auditing; The Scottish Local Authorities Chief Internal Auditors Group (SLACIAG) have implemented a “peer review” framework, in which MC participates, as a cost- effective means of complying with the EQA requirement. Reporting on outcomes includes a statement on conformance with GIAS and the quality assurance and improvement plan (QAIP) to enable an evaluation of the Internal Audit quality management framework and to identify opportunities for improvement. Page 191 of 246
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INTERNAL AUDIT PLAN 2026/27 Appendix 2 SERVICE AREAS TO AUDIT ALLOCATED AUDITOR DAYS CURRENT PROPOSED AUDIT ASSIGNMENTS FROM RISK ANALYSIS Place 120 Days Commercial Rents: Review the processes for ensuring that commercial rents are set collected and recovered in accordance with best practice and Council Policies and ensure best value and compliance with rental agreements in place. (Inherent Risk Assessment: High) Digital Strategy: Provide assurance that the Governance, Internal Control and Risk Management processes are in place to deliver, monitor, review and update the Councils Digital Strategy on an ongoing basis to deliver both functional stability and transformation improvements. (Inherent Risk Assessment: High) Climate Change: Provide assurance that there are appropriate Governance, Monitoring and review controls in place to provide accurate, complete and timely reporting and review of the Council’s Climate change strategy and progress towards the strategy and in accordance with legislative and best practice requirements. (Inherent Risk Assessment: High) Health & Safety Building Safeguarding servicing and checks: Ensure that processes are in place to ensure that all legislative requirements are completed for maintaining Council public Buildings in an safe and useable state. (Inherent Risk Assessment: High) . Children, Young People & Partnerships 150 Days School Trips: Provide assurance that processes are being maintained to ensure that all schools trips are evaluated for risk (specifically health & safety, insurance and financial risk), educational benefit and that the process of approval is maintained for all trips being undertaken in a consistent and reliable basis. (Inherent Risk Assessment: High) Children’s Services outwith area placements: Review of authorisation, review and monitoring processes to ensure best outcomes for the Children and best value for the Council are in place and operating as appropriate. Education Estate Project Management: Specific reviews of Besslack Community High School Replacement, Penicuik High School and Shawfair All Through Campus as individual reviews: Review the processes in place to ensure effective Council management processes that ensure that Council core outcomes are being managed in an appropriate manner to provide assurance that these projects are being managed to ensure Best Value for the Council. Page 193 of 246
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SERVICE AREAS TO AUDIT ALLOCATED AUDITOR DAYS CURRENT PROPOSED AUDIT ASSIGNMENTS FROM RISK ANALYSIS Chief Executive Services (Including Finance) 30 Days Insurance: Provide assurance that processes are in place to provide effective and best value insurance for the Council, is operated in an efficient and effective manner, and that there is appropriate governance and internal control processes to highlight areas of risk that could decrease the achievement of Best Value with insurance cover. (Inherent Risk Assessment: High) Adult Social Work 30 Days Resource Planning & Monitoring: Review the Governance and Internal Control Processes for monitoring the use of available resources and the authorisation processes and planning of best value use of resources. Integration Joint Board 30 Days Time has been allocated for work that will be undertaken by Internal Audit for the Midlothian Integration Joint Board (IJB). A separate audit plan will be prepared which will be presented to the IJB Audit and Risk Committee for approval. Review of Previous Year’s Work 25 Days Internal Audit will review the outcome of our previous year’s work to ensure recommendations have been actioned as agreed and that risks accepted by Management have been properly managed. Annual Governance Statement 28 Days Prepare an annual assurance report for Management and the Audit Committee summarising the work undertaken by Internal Audit during the year and forming an opinion on adequacy of the Council’s arrangements for risk management, governance and internal control. Continuous audit approach on progress with areas of improvement. Annual evaluation of compliance with the Local Code of Corporate Governance covering the corporate whole and individual Directorates/Services. Audit & Governance Committee Annual Review 4 Days Assist the Chair and Audit & Governance Committee Members with the completion of the Annual review of the Committee in line with the CIPFA Statement and best practice Page 194 of 246
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SERVICE AREAS TO AUDIT ALLOCATED AUDITOR DAYS CURRENT PROPOSED AUDIT ASSIGNMENTS FROM RISK ANALYSIS Annual Planning 10 Days Complete the review of Risk Assessment processes, identification of key risk areas assessment against the audit universe and identification of the links between the Council Objectives and the Internal Audit work for the 2027/28 annual audit plan. Attendance at Boards and Committees 20 Days Attendance at EMT, CMT, SMT, Audit & Governance Committee, Risk Management and Integrity Group. Advice and Consultancy 30 Days Consultation on New Systems – for new systems implemented, Internal Audit will provide advice on internal control matters. Helpdesk Enquiry System – Provide guidance and advice to Management and Staff on internal controls. Consultancy – providing advice and consultancy on internal control issues. Training 15 Days An adequate allocation of budget resources and time will be given to maintaining and improving the knowledge base and quality of the staff resource. This includes time to attend the Scottish Local Authority Chief Internal Auditor Group (SLACIAG) and computer audit, fraud and data analytics subgroups and attend their Conferences, ensure appropriate Ethics and Objectivity training in line with Global Internal Audit Standards and to ensure that all qualified staff to undertake continuous professional development in line with institute requirements and provide training towards qualification when necessary. Page 195 of 246
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SERVICE AREAS TO AUDIT ALLOCATED AUDITOR DAYS CURRENT PROPOSED AUDIT ASSIGNMENTS FROM RISK ANALYSIS Quality Assessment 15 Days The Global Internal Audit Standards that apply to the Council from the 1 April 2025 requires an annual Internal Quality Assurance review is completed by the Service Manager – Internal Audit on an annual basis and that the results are reported to the Audit & Governance Committee. the Internal Audit section will also be subject to an External Quality Assessment (EQA) at least every five years, by appropriately qualified and independent reviewers. EQA processes are completed by inclusion on the SLACIAG peer review process which provides substantial best value in ensuring this process is completed. MLC Administration of Audit Scotland Reports 4 Days Monitor publication of Audit Scotland reports and co-ordinate submission by Management of Audit Scotland Reports to the relevant Committee. Total 511 Days This matches to the 2.61 FTE staff resources available for Internal Audit in 2026/27. Page 196 of 246
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Audit Committee Monday 23 February 2026 Item No 5.6 Counter Fraud Annual Plan 2026/27 Report by Chief Internal Auditor Report for Decision 1 Recommendations The Audit Committee is invited to: a) Approve the Counter Fraud Annual Plan 2026/27 (Appendix 1). 2 Purpose of Report/Executive Summary The purpose of this report is to gain approval from the Audit Committee for the proposed Counter Fraud Annual Plan 2026/27 to support the delivery of the Council’s Counter Fraud Strategy and to demonstrate compliance with the Council’s Counter Fraud Policy Statement. 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 Midlothian Council’s resilience to the risk of fraud, theft, corruption and crime, and ensure these are embedded preventative practices as specific changes associated with the Counter Fraud Strategy approved by Council in August 2020. The Counter Fraud Annual Plan 2026/27 (Appendix 1) sets out the planned counter fraud activity to support the approach and culture of the Council in tackling fraud and corruption to deliver the Counter Fraud Strategy. This will enable the Council to demonstrate compliance with its Counter Fraud Policy Statement as its commitment to tackling fraud and reflects the Integrity Group’s assessment of counter fraud controls. Date 2026 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 197 of 246
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3 Background 3.1 A review was carried out in 2019/20 of counter fraud management arrangements in place and to make improvements in light of the significant fraud investigations that have occurred within Midlothian Council in recent years, noting that some are ongoing. 3.2 The conclusion of the review included a refresh to the corporate policy and strategy for tackling fraud. A revised Counter Fraud Policy Statement and Counter Fraud Strategy and proposal to have 2 FTE Corporate Fraud Officers to deliver the revised Counter Fraud Policy and Strategy were approved by Midlothian Council in August 2020. 4 Counter Fraud Annual Plan 2026/27 4.1 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 Midlothian Council’s resilience to the risk of fraud, theft, corruption and crime (including cybercrime and money laundering) and ensure these are embedded preventative practices as specific changes associated with the Counter Fraud Strategy approved by Council in August 2020. 4.2 The Counter Fraud Annual Plan 2026/27 (Appendix 1) sets out the planned Counter Fraud activity to support the change in approach and culture for the Council for tackling fraud and corruption to deliver the approved Counter Fraud Strategy. This will enable the Council to demonstrate compliance with its Counter Fraud Policy Statement as its commitment to tackling fraud and reflects the Integrity Group’s assessment of counter fraud controls (update submitted to the Audit Committee in January 2022). 5 Report Implications (Resource, Digital, Risk and Equalities) 5.1 Resource The primary responsibility for the prevention, detection and investigation of fraud rests with Management, supported by the Integrity Group and the Corporate Fraud Team. The purpose of the Integrity Group is to improve the Council’s resilience to fraud, corruption, theft and crime (including cybercrime and money laundering). The formal establishment of the Integrity Group with a Terms of Reference (approved by the Audit Committee on 22 June 2020) enables the shift to more holistic working in multi- disciplinary forums to tackle fraud in a consistent and collaborative way across the Council. The revised Counter Fraud Policy Statement and Counter Fraud Strategy and proposal to have 2 FTE Corporate Fraud Officers to deliver the revised Counter Fraud Policy and Strategy were approved by Midlothian Council in August 2020. The 2 Corporate Fraud Officers are line managed by the Principal Internal Auditor who reports to the Chief Internal Auditor. Page 198 of 246
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Savings will continue to be identified arising from Corporate Fraud Team activity, which will be stated within the Counter Fraud Annual Reports presented to the Audit Committee. 5.2 Digital None. 5.3 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 focus on enhancing fraud prevention and detection to improve Midlothian Council’s resilience to the risk of fraud. The work undertaken by the Corporate Fraud Team in collaboration with other Services is designed to reduce the fraud risks within the Council. 5.4 Ensuring Equalities An Integrated Impact Assessment (IIA) Form was completed as part of the development of the revised Counter Fraud Policy and Strategy. The conclusion was that undertaking a Combined Impact Assessment was not necessary as the policy / proposal has little relevance to equality, negligible impact on the economy, and no impact on the environment. 5.5 Additional Report Implications (See Appendix A) Page 199 of 246
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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 Midlothian 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 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 arrangements for tackling fraud as set out in the Counter Fraud Policy Statement and Counter Fraud Strategy that were approved by Council in August 2020. 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 approved 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 continuous improvement to be evaluated, managed and evidenced demonstrate best value in the use of resources. Page 200 of 246
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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, as stated in the Counter Fraud Annual Report that reported outcomes of corporate fraud activity, some of which arose from whistleblowing received from 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 Integrity Group and 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 Midlothian 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 approved Counter Fraud Strategy. 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 including sustainable outcomes. Page 201 of 246
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Midlothian Council Counter Fraud Annual Plan 2026/27 Appendix 1 Ref Category Activity Nos of Days Commentary 1. Compliance Contractor Oversight 20 Oversight of Contractor arrangements with third parties to assess compliance with procurement rules. 2. Compliance Corporate Fraud Enquiries 155 Respond to whistleblowing notifications. 3. Data Match National Fraud Initiative 80 Co-ordinate the NFI exercise across Council services, finalise review and investigate remaining data matches from 2024/25 exercise, coordinate and finalise provision of data for 2026/27 exercise. 4. Compliance Social Housing 30 Social Housing enquiries and investigations. 5. Compliance Council Tax 20 Council Tax enquiries and investigations. 6. Other Corporate Fraud Policy Framework 20 Support the Integrity Group with monitoring of policies and procedures review, update and communication. Assist with the self-assessment of compliance against the CIPFA code on Managing the Risk of Fraud and Corruption. 7. Other Fraud Risk Assessments 70 Develop a risk assessment process and support operational Service Managers to assess fraud risks and develop improved mitigating controls to ensure the Council has an ability to attempt to prove that it has reasonable procedures in reference to the Crime of Failure to Prevent Fraud. 8. Other Fraud Awareness Training 40 Develop and staff training modules both for offline and online training across the Council on Fraud, Bribery and Corruption and assist in the implementation of this training. 9. Other Integrity Groups 6 Attend and provide support to the Council’s Integrity Group. 10. Other Training and Development 20 Time to attend the Scottish Local Authority Investigators Group Meetings and training from NAFN and other required Council and Risk Management training. 11. Other Management & Review 50 Includes management time to review work completed and support thr development of policies, procedures and staff. Corporate Fraud Total 511 Page 202 of 246
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Audit Committee Monday 23 February 2026 Item No 5.7 Strategic Risk Management – Strategic Risk Profile Quarter 3, 2025-26 Report by Derek Oliver, Chief Officer Place Report for Information 1 Recommendations Audit Committee is recommended to: • Note the current risk landscape and organisational response to the most significant risks in Quarter 3, 2025-26 (1st October to 31st December 2025). 2 Purpose of Report/Executive Summary The purpose of this report is to provide Audit Committee with: • An update on the risk responses Midlothian Council has implemented during Q3 2025/26 to respond to the current risk climate • Assurance that Midlothian Council took a proportionate and planned approach to prepare and respond to the current risk climate • The risk evaluation of current strategic risks and opportunities for the Council 6th February 2026 Report Contact: Derek Oliver, Executive Director – Children, Young People and Partnerships Derek.Oliver@midlothian.gov.uk Page 203 of 246
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3 Q3 Risk Management Overview 3.1 Midlothian Council has delivered a wide range of services to the people of Midlothian throughout Quarter 3, 2025-26. 3.2 The Council continues to manage and review risks recorded within the Strategic Risk Profile. The work required to maintain the necessary corporate oversight over the broader strategic landscape continues through the Risk and Resilience Chief Officer Group and Corporate Management Team (CMT). 3.3 Audit Committee should note that there were no new risks added from the previous Quarter however, as per the request from Audit Committee, the Strategic Opportunities section was revised to include Strategic Projects. The Projects included have a Red category across their respective Risk Evaluation. Updates on actions taken are included in the full strategic risk profile (Appendix B). 3.4 Strategic Risk Profile (SRP) The SRP is split into three sections: • Strategic Issues • Strategic Risks • Opportunities 3.5 STRATEGIC ISSUES - SUMMARY Strategic issues Likelihood Impact Score Evaluation Q3 2025/26 Q2 2025/26 The Change Programme 5 5 25 Critical Critical Financial Sustainability 5 5 25 Critical Critical 3.6 The Change Programme The Change Programme remains evaluated at Critical. The financial challenges of the forecasted budget gap pose a significant challenge for benefits realisation. Council agreed to a Transformation Blueprint in June 2023 which is a 5-year transformation plan. 3.7 Financial Sustainability The scale of the financial challenge continues to be reported to the Business Transformation Steering Group and Council. Page 204 of 246
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3.8 STRATEGIC RISKS – SUMMARY Strategic Risks Likelihood Impact Score Evaluation Q3 25-26 Q2 25-26 Financial Sustainability in Future Years 5 5 25 Critical Critical The Long-Term Change Programme 5 5 25 Critical Critical Legal and Regulatory compliance 5 5 25 Critical Critical Climate Change 5 5 25 Critical Critical Emergency Planning and Business Continuity 4 5 20 High High Health & Safety/Fire Safety 4 5 20 High High Cyber Security 4 5 20 High High Growing Council 4 4 16 High High Scottish Child Abuse Inquiry 4 4 16 High High Asset Management 3 5 15 Medium Medium Cost of Living Crisis 3 5 15 Medium Medium Counter Terrorism 3 4 12 Medium Medium Employee Performance 3 4 12 Medium Medium Care at Home 3 4 12 Medium Medium Governance and Standards 2 4 8 Low Low Internal Control Environment 2 3 6 Low Low Corporate Policies and Strategies 2 3 6 Low Low 3.9 STRATEGIC RISKS – RATED CRITICAL/HIGH 3.10 Financial Sustainability in future years The scale of the financial challenge continues to be reported to Business Transformation Steering Group and Council. 3.11 The Long-Term Change Programme The Change Programme has remained at Critical for the last 2 years. The financial challenges of the underlying budget gap pose a significant challenge. Council agreed to a Transformation Blueprint in June 2023 which is a 5-year transformation plan. Page 205 of 246
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3.12 Legal and Regulatory compliance Significant resourcing pressures have impacted on risk evaluation. Work is ongoing with the Scottish Information Commissioner and National Records of Scotland to develop and deliver improvement plans. 3.13 Climate Change Councillors were presented with a briefing on the Climate Action Plan in Q2 24-25 as committed to through the Transformation Blueprint. With a report presented to October Council, Councillors approved, given the challenges (particularly financial), the realignment of the target deadline of 2030 for net zero emissions from the Midlothian Council estate to 2045. In light of this, a refresh of the Council’s Climate Change Strategy, approved by Council in August 2020, is progressing. 3.14 Emergency Planning and Business Continuity Ongoing monitoring of a changing landscape and maintaining organisational readiness and preparedness. Increase in evaluation score aligned to internal audit of Risk Management, specifically in relation to a focus on lack of resource, service risk registers and business continuity planning, as previously reported to Committee. Service review remains pending. 3.15 Health and Safety/Fire Safety New Head of Establishment Fire Information Handbook, Fire Evacuation Plan template and Fire Logbooks rolled out with emphasis on need to complete/update plans urgently. Estate Safety & Maintenance Groups refreshed to identify and action any priority safety or repairs matters. Health, Safety & Resilience service review progressing. 3.16 Cyber Security With the current climate and intelligence, the overall evaluation is High. Our teams remain vigilant and have in place necessary cyber resilience action plans and certification. 3.17 Growing Council The risk evaluation remains High in Q3 2025-26. This is in response to the current financial challenge as described above and the increased pressure the Council faces with growth. Some current examples of this include: • Inflationary impact on the delivery of the capital programme • Cost of living crisis Page 206 of 246
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• Pressure on the care sector as people are living longer and require more care provision • General population growth places additional demand on infrastructure such as GPs, schools, waste services etc. 3.18 Scottish Child Abuse Inquiry (SCAI) The SCAI risk evaluation remains High as the Inquiry continues. 3.19 STRATEGIC OPPORTUNITIES 3.20 Capital Projects - Housing Projects impacted with 26% reduction in Affordable Housing Supply Programme grant to Midlothian and continued high build costs. Phase 5 housing programme has been reviewed to ensure affordability within the Housing Revenue Account, allowing for reduced levels of grant. Projects highlighted with specific Red Risk Evaluation(s) and detailed within the SRP are Newbyres, Gorebridge; Edmonstone Road, Shawfair and Newton Church Road, Danderhall. 3.21 Capital Projects – Transport, Net Zero & Infrastructure Cost of delivering enabling infrastructure projects has risen, resulting in significant funding gap emerging and impacting on progress of A701 Relief Road, Sustainable Transport Corridor and Straiton Junction Improvements, which are detailed within the SRP. 3.22 Capital Projects – Children, Young People & Partnerships Estates Programme: Primary 1. Mayfield/St Lukes PS New Build: Contract signed and financial close reached June 2025. Construction of the campus well under way and Phase 1 due for completion April 2027. 2. Kings Park PS Extension & Refurbishment: No available budget to undertake extension. Condition and suitability of school to be addressed. 3. Rosewell PS Extension: No available budget to undertake extension. Condition and suitability of school to be addressed. 2 modular classes were added in August 2024. 4. Mauricewood PS Extension & Refurbishment: Rising roll and catchment review requires investment in school to address capacity and suitability. Limited budget available. Design team appointed to develop investment in school that aligns with budget available from Developer Contributions. Tender for 6 class extension and additional games hall due to be returned in February and will a report will be brought to the relevant governance board. 5. Bilston PS Extension: Rising roll and catchment review requires investment in school to address capacity and suitability. Contract signed and financial close reached January 2026. 4 class extension due for completion August 2026 Page 207 of 246
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3.23 Capital Projects – Children, Young People & Partnerships Estates Programme: Secondary 1. Beeslack HS Replacement: Contractor appointed. Due to rising market costs a redesign process is underway. 2. Shawfair All Through: Site acquisition complete. School location fixed with design team. Remediation programme due to begin. Contractor appointed for Campus project. Planning and catchment consultations are taking place. School due to be complete August 2028. 3. Penicuik HS New Build: Additional budget approved December 2025 allowing construction phase to commence. Project due for completion Spring 2028 3.24 Capital Projects – Regeneration Three specific projects identified within the SRP: 1. Vogrie Changing Places: now progressing . 2. Destination Hillend: Alpine Coaster delivered with access and parking infrastructure. Project absorbed risk and contingency. Delays to delivery resulting from issues with access / water mains. Main Building tender return exceeded budget. Next Phase to be recast. Interim works on water supply and drainage required. 3. Hopefield Industrial Estate: Updated financial model required. 3.25 City Region Deal Edinburgh and South East Scotland City Region Deal - bid for funding to Scottish and UK Governments to accelerate economic growth through investment in infrastructure/ housing/ skills and innovation was agreed by Council in June 2018. Projects continue to be progressed with realisation of regional enhancements and connectivity. 4 Report Implications (Resource, Digital and Risk) 4.1 Resource There are no direct resource implications indicated in this report, although individual risks have associated resource implications. 4.2 Digital None 4.3 Risk The risks reported in this report are understood with the Council able to demonstrate the current risk controls and actions being taken in response to these. The report provides an overview of the significant risks faced by the Council during Quarter 3, 2025-26 and should act to provide assurance that Midlothian Council took a proportionate and planned approach to prepare and respond to each of these risks. Page 208 of 246
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4.4 Ensuring Equalities (if required a separate IIA must be completed) There are no direct equalities issues arising from this report. 4.5 Additional Report Implications (See Appendix A) See Appendix A Appendices Appendix A – Additional Report Implications Appendix B – Strategic Risk Profile (Quarter 3, 2025-26) Page 209 of 246
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APPENDIX A – Report Implications A.1 Key Priorities within the Single Midlothian Plan This report provides an overview of the Strategic Risk Profile of Midlothian Council at a defined point in time. The issues, risks and opportunities affecting or supporting delivery of the council priorities are set out within the Strategic Risk Profile. 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 Council’s commitment to best value and securing continuous improvement can best be delivered when decisions are made against a backdrop of understanding the risks and opportunities before an organisation. This report seeks to provide assurance that the current risk environment is understood and that Midlothian Council is taking appropriate action in response to those identified risks. A.5 Involving Communities and Other Stakeholders This Strategic Risk Profile report has been compiled with input from a range of internal key stakeholders. A.6 Impact on Performance and Outcomes This report seeks to provide an overview of the challenging risk environment within which the Council is operating at this time. Being in a risk aware position helps to inform current and future decision making, with the intention of enhancing decision making and the Page 210 of 246
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associated performance and outcomes which flow from well informed decision making. A.7 Adopting a Preventative Approach The Risk Management approach being taken by the Council is founded on a preventative approach to managing risks, where appropriate and more generally to decision making with far greater risk awareness. A.8 Supporting Sustainable Development Senior Managers must ensure the sustainability of the Council, which entails identifying, understanding and managing Strategic and Service level risks and opportunities. Page 211 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 STRATEGIC RISK PROFILE SRP This risk register captures the main strategic issues, risks and opportunities that are corporate in nature. It identifies the nature of the risks, measures required to control the risks and their evaluation. It also details what further actions are required to reduce the likelihood and impacts of those risks to more acceptable and manageable levels with timescales. Strategic Issues SRP.IR.02 The Change Programme Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.IR. 02 Risk cause The pace of transformation strands of activity, reporting to the Business Transformation Board, does not secure service transformation, delivery of outcomes or benefit realisation. Risk event Delayed progress or non-achievement of outcomes and benefits. Risk effect Slow or delayed financial benefits arising from service redesign, requiring the adoption of recovery plans or requiring short term service reductions which impact on the Council’s ability to deliver against its priorities. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Transformation Blueprint agreed at Council June 2023 which is a 5- year transformation plan. Revised governance for transformation agreed and revised Terms of Reference in place for the Business Transformation Board to oversee progress on change programme. 2. Regular reporting to Council setting out scale of financial challenge ahead with recurring expenditure for current service delivery projected to exceed recurring income. 3. Cross Party Business Transformation Steering Group are given updates on the progress of the Transformation programme. 4. Financial monitoring reports and work of the Corporate Management Team evidence continued financial sustainability, in so far as services are delivered within the overall budget in year. 5 5 Page 213 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Related Action Code Related Action Related action latest note Managed By Due Date Status SPR.R A-02.08 Transformation Blueprint 2023-28 delivery Q3 25/26: As per previous Quarters. Progress with sprints is reported to BTB at every meeting via the dashboard and also in detailed reports at some points. BTSG are provided with an updated dashboard every cycle and receive focused reports on individual sprints and also funding requests to release BT funds to support project work. Chief *Executive; Chief Officer *Place; Chief Officer Corporate Solutions; Chief Finance Officer; 30-Jun-2028 20% SRP.R A.02.03i Develop Medium Term Financial Strategy with greater oversight, clearer responsibility and accountability. Q3 25/26: As Q1 25/26. Q2 25/26: As Q1 25/26. Q1 25/26: Updated MTFS projections to 2028/29 were presented to Council in June 2025. A further update will be provided in quarter 3 of 25/26. Q4 24/25: MTFS projections to 2028/29 were presented to Council in February 2025 as part of setting the 2025/26 budget and accompanying Council Tax levels. A further update will be provided to Council during Q1 of 25/26. Q3 24/25: An update on the MTFS was presented to Council in December along with outcomes from the public consultation. Detailed analysis of emerging national budget positions for 2025/26 was presented and discussed at the Business Transformation Group. Q2 24/25: Further update on the MTFS was presented to Council in October and a public consultation was launched on 9th October running to 20th November. Q1 24/25: An update on the MTFS was presented to Council in June 2024. This identifies immediate actions required, in addition to those in the Transformation Blueprint, to bridge the gap between recurring expenditure and recurring income and to allow the setting of a balanced budget for 2025/26. Chief *Executive; Chief Finance Officer; 30-June-2024 100% Page 214 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.IR.07 Financial Sustainability Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.IR. 07 Risk cause Scottish Government Grant settlements fall short of the resources needed to sustain core services. Core funding falling short of inflation pressures, pay awards and demographic pressures arising from an Increasing ageing population of over 75’s. Increasing population of 0-15 age group. Rising customer expectations. Risk event Transformation activity and the flexibility available to Councils as part of the grant settlement does not address future years projected budget gaps. Risk effect Inadequate government funding makes securing balanced budgets challenging. This in turn erodes the Council’s ability to deliver services to the community and potentially means that resources available fall short of those the Council assess as required to meet its statutory obligations. Whilst transformation activity can help reshape services and ensure best value in the delivery of services it is not a solution to continued erosion of core funding. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. There is an approved Capital Strategy and Reserves Strategy in place. The Capital Strategy is being updated in the context of ongoing and significant infrastructure pressures and to reflect completed Asset Management Plans.. 2. There is an approved budget for 2025/26. Services are delivered within the totality of that budget. 3. Enhanced monitoring arrangements have been agreed for service areas that are regularly showing overspends. 4. Directorates have budget boards in place to monitor and agree actions for those items which are identified as needing specific attention or present a risk to the financial position of services. 5. Strategic Boards in place and BTB focus and attention on driving transformation to support future year’s financial sustainability. 6. Working through COSLA to influence government spending decisions to influence Scottish Government’s budget allocation to Councils. 7. Capital Plan and Asset Management Board will scrutinise and challenge slippage on capital programmes recognising that slippage can have an adverse impact on financial sustainability and also the delivery on assets required to support capital growth. 8. Chief Executive continues to emphasise the need for effective financial control and underlined the benefit to the organisation of such an approach. 9. Scottish Governments May 2022 Resource Spending Review provided planning parameters for term of parliament, albeit these are challenging and present a real terms reduction in grant funding of circa 7% over the period. 10. Report to Council February 2025 sets out scale of financial challenge ahead with recurring expenditure for current service delivery projected to exceed recurring income. Updated MTFS projections presented in June 2025 with a further update to be presented in February 2026. 11. Cross Party Business Transformation Steering Group engaged in consideration of measures to secure balanced budgets alongside the development of a Strategic Plan to support decisions about what services, beyond those which are statutory can be provided. 12. Income Generation 5 5 Page 215 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Related Action Code Related Action Related action latest note Managed By Due Date Status SPR.R A-02.09 Transformation Blueprint 2023 to 2028 Q3 25/26: Refer to SRP.RA-02.08 Q2 25/26: Refer to SRP.RA-02.08 Chief *Executive; Chief Finance Officer; 30-Jun-2024 20% SRP.R A.02.03 Develop Medium Term Financial Strategy with greater oversight, clearer responsibility and accountability. Q3 25/26: Refer to SRP.RA-02.08 Q2 25/26: Refer to SRA.RA-02.08 Chief *Executive; Chief Finance Officer; 30-June-2024 100% SRP.R A-02.10 Capital Plan Prioritisation Q3 25/26: Property & Estates Asset Management Plan moving into delivery with resource allocated. Q2 25/26: Property & Estates Asset Management Plan approved by Council. Fleet Asset Management Plan and Digital Asset Management Plans are under development and are key parts of finalising the Capital Plan Prioritisation exercise. Q1 25/26: Work evaluating information flowing from building condition surveys continues with a view to presenting a draft building Asset Management Plan to Council in October. Q4 24/25: Council in February received an update on Capital Plan Prioritisation work and made a decision on an updated Learning Estate Strategy. The extent and affordability of work flowing from building condition surveys is being assessed and will be concluded and reported to Elected Members early in 2025/26. Q3 24/25: Work continues on Capital Plan Prioritisation Q2 24/25: Work continues on Capital Plan prioritisation Q1 24/25: Work continues on Capital Plan prioritisation Chief Finance Officer; Executive Director – Place; Executive Director - Education 31-Oct-2024 0% Page 216 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Strategic Risks SRP.RR.01 Financial Sustainability in Future Years Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.01 Risk cause: Scottish Government Grant settlements fall short of the resources needed to sustain core services. Core funding falling short of inflation pressures, pay awards and demographic pressures arising from an Increasing ageing population of over 75’s. Increasing population of 0-15 age group. Rising customer expectations. Policy decisions by UK & Scottish Governments which are not fully funded. Changes to the responsibilities of Local Government and the funding implication that arise from that. Future year pay award settlements. Risk event: Real terms reduction in core grant settlements. Policies decisions at Government level not fully funded to Council's. Securing the extent of change required in order to deliver financial sustainability and a change program that recognises the size of the challenge. Cost pressures exceeding budget estimates. Pressures on increasing insurance premiums and associated risk improvement actions. Risk to not achieving financial sustainability is a failure to deliver cost reductions / service change embedded in the blueprint and also supplementing the blueprint. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Development of Strategic Plan, Transformation Blueprint and MTFS projections which come together to provide a framework to effect change and to move the Council to a position of financial sustainability. 2. Maintaining a level of reserves to deal with unforeseen or one-off cost pressures. 3. Capital and Reserves Strategies in place. The Capital Strategy is being updated in the context of ongoing and significant infrastructure pressures. 4. Working through COSLA to influence government spending decisions to influence Scottish Government’s budget allocation to Councils. 5. Implement a lobbying strategy with government to recognise the unique position Midlothian Council is in. 6. Best Value Audit report actions. 7. Strategic Boards in place to drive transformation in line with the Transformation Blueprint. 8. Risk & Resilience Group and CMT oversight of Insurance Risk Improvement Actions. 5 5 Page 217 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .02.03 Develop Medium Term Financial Strategy with greater oversight, clearer responsibility and accountability. Q3 25/26: Refer to SRP.RA-02.08 Q2 25/26: Refer to SRP.RA-02.08 Chief *Executive; Chief Finance Officer; 30-June-2024 100% SRP.RA .02.04 Transformation Blueprint 2023 to 2028 Q3 25/26: Refer to SRP.RA-02.08 Q2 25/26: Refer to SRP.RA-02.08 Chief *Executive; Chief Finance Officer; 30-Jun-2028 20% SRP.RA .02.06 Capital Plan prioritisation Q3 25/26: Property & Estates Asset Management Plan moving into delivery with resource allocated. Q2 25/26: Property & Estates Asset Management Plan approved by Council. Fleet Asset Management Plan and Digital Asset Management Plans are under development and are key parts of finalising the Capital Plan Prioritisation exercise. Q1 25/26: Work evaluating information flowing from building condition surveys continues with a view to presenting a draft building Asset Management Plan to Council in October. Q4 24/25: Council in February received an update on Capital Plan Prioritisation work and made a decision on an updated Learning Estate Strategy. The extent and affordability of work flowing from building condition surveys is being assessed and will be concluded and reported to Elected Members early in 2025/26. Head of *Development; Executive Director *Place; Chief Finance Officer; 31-Oct-2024 0% Page 218 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.02 The Long-Term Change Programme Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.02 Risk cause: A MTFS that does not address the projected budget shortfall or contextual factors relating to the Midlothian area. Reduced resources Leadership fit for the future. Lack of clarity or clear compelling vision for the future Delay or shortfall in securing savings Lack of or not securing transformational change in service provision Risk event: Delayed progress in applying various strands of the Change Programme including Delivering Excellence Framework. Slow benefits realisation and budget savings. Cuts in service provision rather than service transformation Risk effect: Objectives of change not actually met or progress too slow. Adverse impact on services Slow or delayed proposals/savings arising from service redesign. Potentially further eroding reserves or requiring short term service reductions which impact on Council's ability to deliver against its priorities. Staff morale negatively affected, Government step-in short term savings instead of transformation Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Development of Strategic Plan, Transformation Blueprint and MTFS projections which come together to provide a framework to effect change and to move the Council to a position of financial sustainability. 2. Leadership from all Elected Members, Executive Team and Senior Leadership Group. 3. Appropriate governance in place across the BTB Strategic Boards 4. Resilience planning. 5. Capacity to deliver change. 6. High level priority is given to blueprint work. 5 5 Page 219 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.02.03 Develop Medium Term Financial Strategy with greater oversight, clearer responsibility and accountability. Q3 25/26: Refer to SRP.RA-02.08 Q2 25/26: Refer to SPR.RA-02.08 Chief *Executive; Chief Finance Officer; 30-June-2024 100% SRP.R A.02.04 Transformation Blueprint 2023 to 2028 Q3 25/26: Refer to SRP.RA-02.08 Q2 25/26: Refer to SRP.RA-02.08 Chief *Executive; Chief Finance Officer; 30-Jun-2028 20% SRP.RR.03 Legal and Regulatory Compliance Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.03 Risk cause Current or new legislation applying to Midlothian Council. Lack of capacity to resource statutory obligations around GDPR, data protection, records management, information requests and statutory regulatory functions such as fire safety/health & safety and civil contingency/business continuity requirements. Risk event Council and or Services not identifying all applicable legislation impacting Council activities and Service requirements. Risk effect Council failing to meet its statutory obligations resulting in a potential negative impact for service users or employees. Severe financial impacts due to litigation/prosecution. Reputational impact of not meeting statutory obligations. Head of *Adult and Social Care; Legal *and Governance Manager; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Executive Directors, Chief Officer(s) and Head(s) of Service responsible for identifying applicable legislation and propose Council or Service responses to CMT and Cabinet/Council as required. 2. Annual Assurance Statement. 3. Internal Audit testing of internal controls as part of risk-based audit plan. 4. External Audit. 5. Range of external inspection. 6. BTSG oversight of new legislation 7. Central repository of applicable legislation. 5 5 Page 220 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.03.02 Rights of the Child Bill Q1 24/25: Bill now adopted. Policy to be presented to Council May/June 2024. Council wide group established and developing a plan that ensures we are all aware and adhering to UNCRC. Executive Director – People 31-Dec-2024 0% SRP.R A.03.05 Review of Standing Orders, Scheme of Administration and Scheme of Delegation Q4 24/25: Standing Orders and Scheme of Administration updated and approved at Feb 2025 Council Legal & Governance Manager; Executive Director *Place; Chief Officer Corporate Solutions; 28 Feb 2027 40% SRP.R A.03.07 Review of policy and creation of a policy register Q1 25/26: Engagement sessions taking place with each Directorate to review policy register Q4 24/25: Policy list presented to CMT May 2025 for CMT to review and feedback. Chief Officer Corporate Solutions 31-Dec-2025 40% SRP.R A.03.08 Compliance with statutory duties Q1 25/26: Progress Update Review for Records Management Plan submitted and approved by National Records of Scotland and published online. Compliance Team establishment ongoing. Strategic Information Governance Group established and Action Plan in development. Q4 24/25 : Resourcing proposal for a new Compliance Team being agreed by Corporate Management Team. Funding to be identified through existing Corporate Solutions budgets with implementation on a phased basis. Now proceeding to final stages of Managing Change process. Q1 24/25: Records Management Officer in post and reviewing the Records Management Plan, Corporate Retention Policy and Schedule and supporting the development of retention framework for M365 rollout. Chief Officer Corporate Solutions, Legal and Governance Manager 31-Dec-2025 10% Page 221 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.13 Climate Change Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.13 Risk cause Council Services not adequately engaged, resourced or directed to fulfil the requirements of the Climate Change Act. Risk event Council Services not responding to the Climate Change Act with sufficient pace. Risk effect Council failing to meet its obligation under the Climate Change (Scotland) Act 2009 and incurring the associated reputational damage. Chief *Executive; Executive Directors and Chief Officers.. 1. Statutory requirement to report on compliance with climate change duties. 2. Council Carbon Management Plan 3. Approval of a Corporate Climate Change Strategy and action plan 4. CPP Board for Climate Change to bring strategic focus and oversight of plans and progress. 5. Resilience Seminars 5 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .13.04 Delivery of the BTB Board Carbon Neutral by 2030 Q1 25/26: Work continues on revised Climate Action Plan/Strategy. Q3 24/25: Council approved realignment of Net Zero target from 2030-2045. Q2 24/25: Member Briefing delivered. Planning, Sustainable Growth and Investment *Manager; Chief Officer *Place; 31-Mar-2030 0% SRP.RA .13.05 Development of the Strategic Plan 2023- 27 Q3 24/25: Council approved realignment of Net Zero target from 2030 to 2045. Climate Action Strategy refresh to follow. Planning, Sustainable Growth and Investment *Manager; Chief Officer *Place; 31-Mar-2025 90% Page 222 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.09 Emergency Planning and Business Continuity Management Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.09 Risk cause The Council not preparing or timeously reviewing Emergency Plans and testing arrangements to respond to Civil Contingencies Incidents. Risk event There are a wide range of potential events the Council may be expected to respond to e.g., Severe weather incident, Pandemic, infectious diseases, utility disruption etc. Risk effect Loss or degradation of service. Loss or damage to buildings. Not adequately able to recover from the losses, (e.g. staff, major facility such as secondary school, main offices or computer systems etc). Not able to respond competently to a major emergency in the community. Loss of life, livelihoods and property due to inadequacy of response. Reputational consequences and damage. Prosecution through non-compliance with the Civil Contingencies Act. Fatal Accident Inquiries. Costs. Head of *Adult and Social Care; Head of *Development; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; David Robertson; Chief Officer Young People and Partnerships 1. Community Risk Register used to highlight key risks. Council’s plans developed and maintained in response to identified risks. 2. Risk and Resilience Group support development, peer review and roll out of plans. 3. Establishment and service based contingency plans in place and maintained. 4. Emergency response plan setting out general approach to respond to a major emergency in-line with key partner organisations. 5. As part of the Council’s Emergency response the importance of recording decisions made and information available at the time is highlighted as this would be scrutinised in the event of an FAI. 6. Care for People Group – support for those affected by emergencies plus various international asylum cohorts. 4 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.09.02 Development of Emergency Plans Q3 25/26: Plans and Procedures updated this quarter: Emergency Contacts Directory (reflecting staff changes) Severe Weather Plan Business Continuity (BC) Planning: The draft Corporate BC Plan update reported in Q1 awaiting approval/comments. Chief Officer *Place; Senior Manager Protective Services; David Robertson 31 March 2026 25% Page 223 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL There are regular, scheduled, meetings with Cyber Security specialists in Digital Services. Midlothian chairs a group of Scottish local authority representatives invested in BC planning. Support to services for Business Continuity activities and enquiries Participated in a Business and Digital Services BC Planning Day, facilitated by Chief Officer Corporate Solutions CONTEST/Prevent: Support is given to the CONTEST and Prevent SPOC on an ongoing basis, including representation at multi-agency meetings on behalf of the SPOC. Pertinent guidance and information is hosted on the Emergency Planning site on Mid-Hub. Drafted, on behalf of the CONTEST SPOC, the Midlothian Council contribution to the Lothian and Borders Multi-Agency CONTEST Group’s annual report to Scottish Government on CONTEST activities. Monitoring of progress with the anticipated national guidance relating to The Terrorism (Protection of Premises) Act, also known as “Martyn’s Law”. The guidance is expected to assist organisations comply with the Act. There will be at least a 24-month implementation period (from April 2025). Ongoing routine representation at/participation in: Internal meetings requiring a Contingency Planning input Torness Emergency Planning Consultative Group meetings and other Torness multi-agency meetings requiring representation from Midlothian Council. Local Authority Resilience Group Scotland (LARGS) - networking meetings of resilience practitioners General resilience support to colleagues as required. Lothian and Borders Local Resilience Partnership meetings (and associated sub- groups) National Community Resilience Group Ongoing monitoring and circulation of information and liaison with services regarding the Public Switched Telephone Network switch-off (in conjunction with Digital Services). Contributed to the development of a Midlothian Community Action information article on Storms (initiated through the Care for People group). Training and Exercising: Coordinated the Midlothian Council response to the remaining two phases of Exercise Pegasus, the national pandemic exercise (phase 1 was within the Q2 reporting period). An exercise report is expected in due course. Coordinated Midlothian Council participation in a table-top exercise coordinated and facilitated by the Lothian and Borders Multi-Agency CONTEST Group Page 224 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Coordinated a severe weather related briefing by a Met Office Civil Contingencies Adviser to the Managers’ Forum. Promulgated information to relevant services on (and attended) a briefing session relating to Hostile Vehicle Mitigation. Promulgated information to relevant services on (and attended) a training session relating to Resilience Direct which is a Cabinet Office system for sharing information during planning and response. Incidents: Support to Protective Services colleagues and others relating to Avian Flu outbreak in December 2025. Progress with review of emergency plans and business continuity arrangements remains challenging due to reduced resources. Q2 25/26: As Q1 25/26 for service review. Plans and Procedures updated: Emergency Contacts Directory (reflecting staff changes) Business Continuity (BC) Planning: The draft Corporate BC Plan update reported in Q1 awaiting approval/comments. In collaboration with Digital Services, the information on the previous Emergency Planning and Business Continuity Intranet Portal has been made available via the front page of Mid-Hub. There is a specific area for Business Continuity which will be further developed in the coming months There is regular, scheduled liaison with Cyber Security specialists in Digital Services. CONTEST/Prevent: Support is given to the CONTEST and Prevent SPOC on an ongoing basis, including representation at multi-agency meetings on behalf of the SPOC. Pertinent guidance and information is hosted on the Emergency Planning site on Mid-Hub. Drafted, on behalf of the CONTEST SPOC, the Midlothian Council response to a Scottish Government questionnaire relating to Protect and Prepare. Monitoring of progress with The Terrorism (Protection of Premises) Act, also known as “Martyn’s Law”. National guidance is awaited which will assist organisations in complying with the Act. There will be at least a 24 month implementation period (from April 2025). Ongoing routine representation at/participation in: Internal meetings requiring a Contingency Planning input, including Care for People, Estates Safety and Management Groups Page 225 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Support to services for Business Continuity activities Torness Emergency Planning Consultative Group meetings and other Torness multi-agency meetings requiring representation from Midlothian Council. Local Authority Resilience Group Scotland (LARGS) - networking meetings of resilience practitioners General resilience support to colleagues as required. Lothian and Borders Local Resilience Partnership meetings. Undertook/facilitated: Ongoing monitoring and circulation of information and liaison with services regarding the Public Switched Telephone Network switch-off (in conjunction with Digital Services). Training and Exercising: Attended information sessions, and provided briefings to senior colleagues, on a national pandemic exercise scheduled for Autumn 2025. The exercise takes place in three phases, the first one was held in Q2, the remaining phases will be in Q3. Drafted the Midlothian Council contribution to the Lothian and Borders Local Resilience Partnership’s response to the Phase 1 scenario. The exercise is ongoing. Nominations have been submitted for a counter-terrorism exercise is being held by the Lothian and Borders Multi-Agency CONTEST Group in November 2025. Progress with review of emergency plans and business continuity arrangements has been hindered this quarter due to a combination of the reduced resource and annual leave. Q1 25/26: As Q4 24/25. The service review for the Health, Safety and Resilience Team Service, which includes Contingency Planning, requires to progress to implementation stage. SRP.R A.09.03 Business Continuity Software System Q3 25/26: As Q2 Q2 25/26: Not renewing Clearview software. Sharepoint to be utilised. Resource requirements identified within service review for business continuity. Chief Officer *Place; Senior Manager Protective Services; David Robertson 31-Dec-2025 25% Page 226 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.19 Health & Safety/Fire Safety Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.19 Risk cause Failing to identify and rectify non- compliance with Health & Safety and Fire Safety legislation. Risk event Reactive rather than pro-active organisational health & safety/fire safety culture. Employees/Managers not adequately trained. Employees required to undertake tasks in which they are not trained or competent. Statutorily driven health and safety protective arrangements for service users and employees not implemented sufficiently or correctly. Non-compliance with policy and procedure. Serious fire leading to loss of life and property. Health and Safety team inadequately resourced to promote or implement pro- active measures or train managers/staff. Audits and inspections not being undertaken to confirm adherence to policy and legislative requirements. Loss of highly experienced staff due to partial or full retirement. Risk effect Death, serious injury or ill health impact on employees and/or service users. Loss or damage of Council property. Negative impact on outcomes for customers and service users. Severe impacts on delivery of services due to staff absences. Service users and employees exposed to hazards where statutory requirements exist. Statutory health and safety duty of care to services users and employees not met. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; David Robertson; Chief Officer Young People and Partnerships 1. Health Safety and Wellbeing Strategy & Service Plan. 2. Suite of Health and Safety Management Arrangements developed setting out council response to statutory obligations. 3. Use of Health & Safety Management Information System (SPHERA) to enhance information transfer and organisational efficiency. 4. Training programme in place to support those with responsibility for managing health and safety. 5. Programme of fire risk assessments. 6. Estate Safety & Maintenance Groups for prioritising any matters requiring escalation. 4 5 Page 227 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Statutory notices and/or prosecution by HSE or SFRS resulting in significant fines. Criminal prosecution of the Corporate body and or individuals through Corporate Homicide (Corporate Manslaughter). Reputational damage. Significant costs incurred to Council due to insurance claims, loss of services, plant or buildings. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.19.01 Delivery of Health, Safety and Wellbeing Service Plan Q3 25/26: Service Plan to follow service review Q2 25/26: Service Plan to follow service review. Chief Officer *Place; Senior Manager Protective Services; David Robertson 31-Mar-2025 0% SRP.R A.19.02 Health, Safety & Resilience Service Review Q3 25/26: As Q4 24/25. Q4 24/25: The service review for the Health, Safety and Resilience Team Service needs to progress to implementation stage. Chief Officer *Place; Senior Manager Protective Services; David Robertson 31/10/2025 0% SRP.R A.19.07 H&S fire safety audit across all Council estate Q3 25/26: Progress with fire risk assessments on a priority basis. Q2 25/26: Progress with fire risk assessments on a priority basis. Q1 25/26: Fire Risk Assessment work plan started – priorities being premises with sleeping risks, schools, depots, main offices, leisure centres and libraries. Chief Officer *Place; Senior Manager Protective Services; David Robertson 31-Mar-2026 20% Page 228 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.21 Cyber Security Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.RR.21 Risk Cause Malicious attempts to damage, disrupt or gain unauthorised access to Council computer systems, networks or devices. Risk Event The cyber threat is severe and advancing quickly. The Council is at significant risk of cyber-attack from Ransomware Phishing Emails, Advanced Persistent Threats (APT) and Distributed Denial of Service Attacks (DDOS) attacks. Hacking and Social Engineering. Risk Effect Access to Council systems by cyber criminals and foreign intelligence agencies for financial, commercial or information gathering reasons. This could lead to significant financial losses, data compromise and subsequent regulatory sanction if our technical and organisational measures are deemed insufficient. Severe business disruption including the almost total loss of critical IT systems and networks leading to significant service delivery challenges. Head of *Adult and Social Care; Cyber Security Information Governance and *Compliance Manager; Head of *Development; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; David Robertson; Chief Officer Young People and Partnerships 1. Implementation of and compliance with the Scottish Government Cyber Resiliency Public Sector Action Plan 2. Cyber Essentials Plus Certification 3. Public Sector Network Certification 4. Regular Audits and Inspections 5. Appropriate technical and organisational measures deployed to reduce the likelihood and impact of an attack 6. Having adequate skills and knowledge in the organisation 7. Implementing Scottish Government Cyber Security Action Plan 8. Adoption of the NCSC (National Cyber Security Centre) Active Cyber Defence programme 9. Technology upgrades 10. Incident Response plans and exercises 11., Security Operations Centre onboarding 12. Cyber Incident Response onboarding 4 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA.21.1 Appropriate Technical and Organisational Measures Q3 25/26: Despite the ever increasing cyber security threats, good progress has continued this quarter, including: Cyber Security Information Governance and *Compliance Manager 31-Mar-2027 75% Page 229 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL • Appointing a Cyber Incident Response (CIR) company to support the Council in the event of a cyber attack • Appointing a third party provider to deliver a Security Operations Centre (SOC) service, monitoring the Council’s network 24/7, 365 days per year, recognising that cyber attacks often occur outside normal business hours • Promoting a different themed cyber security awareness message to staff each month, alongside ongoing phishing exercise • Successfully defending the organisation against multiple cyber attacks • Providing security oversight for the onboarding of several new applications and technical services • Conducting a full day cyber security planning exercise at Danderhall Q2 25/26: Work continues this quarter to maintain and strengthen our cyber security. Key successes this quarter include: • Digital Services completed a detailed DWP security audit. • A penetration test of the schools network was conducted • Successfully defended the organisation against multiple cyber attacks. • Security oversight was provided for the onboarding of several new applications and technical services • A SOC (security operations centre) and CIR Cyber Incident Response tender) was prepared and issued Q1 25/26 Work continues this quarter to maintain and strengthen our cyber security. Key successes this quarter include: • Cyber Essentials Plus Certification and PSN Certification were successfully achieved, demonstrating compliance with national standards. • Successfully defended the organisation against multiple cyber attacks. • A confidential Cyber Defence Briefing Note was submitted to CMT following high-profile UK cyberattacks, including one targeting West Lothian’s education network. • Security oversight was provided for the onboarding of new applications and technical service Page 230 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.16 Growing Council Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.16 Risk cause Population growth in Midlothian over the next 10 to 15 years will see Midlothian become the fastest growing Council in Scotland. Between 2014 and 2039, ages 0-15yrs, population is projected to increase by 20% and for ages 75+ population projected to increase by 100%. Risk event Failure to resource and plan for these rises will significantly impact the Councils ability to fulfil its statutory obligations in relation to these groups. Risk effect Inadequate capacity within the school estate to cope with the projected increase in pupil numbers. Insufficient provision to support an aging population placing costly inefficiencies on other parts of the care sector. General population increase placing additional demand on infrastructure including GP services. Increased pressure on infrastructure, services e.g., waste collection and growth of road network as new development roads are adopted. Head of *Adult and Social Care; Chief *Executive; Executive Director *Place; Fiona *Robertson; Chief Officer Young People and Partnerships 1. Local development plan and supplementary guidance on developer contributions. 2. Services planning future service provision on the basis of anticipated service demands 3. The change programme 4. Learning Estate Strategy 5. Capital Plan Prioritisation 6. Strategic Housing Investment Strategy 7. Rent Review Strategy 8. Joint needs assessment used to develop - IJB Strategic Plan 9. Capital Plan and Asset Management Board will scrutinise and challenge slippage on capital programmes recognising that slippage can have an adverse impact on financial sustainability and also the delivery on assets required to support capital growth. 10. City Deal provides the opportunity to support inclusive growth. 4 4 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .02.06 Capital Plan prioritisation Q3 25/26: Property & Estates Asset Management Plan moving into delivery with resource allocated. Q2 25/26: Property & Estates Asset Management Plan approved by Council. Fleet Asset Management Plan and Digital Asset Management Plans are under Head of *Development; Executive Director *Place; Chief Finance Officer; 31-Oct-2024 75% Page 231 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL development and are key parts of finalising the Capital Plan Prioritisation exercise. Q1 25/26: Work evaluating information flowing from building condition surveys continues with a view to presenting a draft building Asset Management Plan to Council in October. Q4 24/25: Council in February received an update on Capital Plan Prioritisation work and made a decision on an updated Learning Estate Strategy. The extent and affordability of work flowing from building condition surveys is being assessed and will be concluded and reported to Elected Members early in 2025/26. SRP.RR.14.1 Scottish Child Abuse Inquiry Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.14.1 Risk Cause: Midlothian Council and its legacy organisations, predating the creation of Midlothian Council in 1996, have been involved in the provision of care of children going back to living memory. During this time there is the likelihood that the care children received fell below standards of care now in place. There is the further potential that some people in the care of Midlothian Council and its legacy organisations were subject to abuse by those who were employed to care for them. Risk Event: The Scottish Government began an Inquiry into cases of Child Abuse occurring prior to 17 December 2014, the intention of this enquiry is to identify historic case of abuse which have to date gone unreported. Chief *Executive; Chief *Social Work Officer The Council initially set up an Inquiry Project Team, however this is no longer required as we have an experienced worker overseeing all requests for the Scottish Child Abuse Inquiry Team. Work is ongoing and we have the additional tasks of supporting and responding to enquiries from the redress team. The Inquiry Team have established a Project Plan covering: 1. Residential establishments, List D Schools and Foster Carers: identifying Children’s homes, Foster Carers and any List D Schools in Midlothian over the last 100 years and researching historic records. 2. Record Audit: reviewing the Council’s existing paper and electronic recordkeeping systems to identify relevant records and map them to residential establishments. This also includes, where possible, noting the Council’s historic recordkeeping policies, such as retention schedules. 3. Cataloguing/Indexing: checking and updating existing recordkeeping systems for accuracy and consistency, enabling effective information retrieval when requested by the Inquiry. The Project Team have established a Project Plan covering: 4 4 Page 232 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL The most recent Section 21 notice around the Foster Care Case Study is a significant piece of work. The request for information from 1930 to date is very challenging given the volume of files that require to be read and analysed. Risk Effect: If the inquiry finds historic cases of abuse in Midlothian this could damage the reputation of the Council and could place doubt in the eyes of the public as to the safety of those currently in care. There is significant scope for a substantial financial impact arising from claims of historic abuse. Some existing employees may be affected by the inquiry and subsequent claims of abuse. To date there has been no evidence from the extensive file read to suggest there has been systemic abuse within our foster care system. 4. Ascertaining the succession and insurance position in relation to potential historic child abuse claims. 5. Ascertaining and agreeing Midlothian Council’s legal position/ approach in dealing with the potential historic child abuse claims. 6. Identifying the need for guidance, protocol, templates etc. should/if any claims be made against the council. 7. Project team is in place with project plan with a range of identified actions which are being progressed. Monthly meetings to progress project plan. 8. The SCAI Social Worker is very competent and experienced in this area of work and provides quarterly updates on their findings from the file read. This is a real strength within this area of work. The CSWO and Principal Solicitor meet regularly with the social worker to discuss findings from the file read. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.14.03 Foster Care and Residential Care File Review Q3 24/25: Phase 10 is now in progress with investigation of residential care homes run by local authorities. We will comply with all s21 requests. Childrens Services Management Team; Chief *Social Work Officer; Chief Officer Young People and Partnerships 31-Mar-2024 100% Page 233 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.08 Asset Management – Buildings, Vehicles, Roads and Digital Assets/Networks Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.08 Risk cause Many of the assets the Council own by their nature are in a position of ongoing deterioration through their normal use, e.g., roads - normal wear and tear, streetlights and vehicles & buildings used to deliver services. Risk event Many assets will deteriorate under normal conditions although buildings, roads and streetlights as an example can be damaged during more extreme weather events or as a result of a lack of maintenance. Risk effect In the case of Roads Services there is a real risk of increased potholes and insurance claims, reduced skid resistance leading to higher accident potential and building up of higher costs in the future. In respect of vehicles, increased breakdowns, service failures, greater maintenance inevitable, higher short-term hire costs. In terms of property, health and safety issues arise, failure to meet current standards and higher running costs. There is also the risk of two-tier accommodation, some high quality, some low. Head of *Adult and Social Care; Head of *Development; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. There is provision in place within the capital plan for investment in the asset base. 2. Asset register 3. Condition Survey 4. Understanding of future asset needs 5. Asset Strategy: . Roads . Land . Fleet . Digital Service Network . Digital Service hardware 6. Capital programme - investment in estate. 7. Ongoing monitoring of properties by: Maintenance Surveyors, Facilities Management and Property Users. 8. Established Capital Plan and Asset Management Board and dedicated Asset Management Board 9. Establishment of 7 thematic Estate Safety and Management Groups chaired by Chief Officer Place 10. Building Accessibility Strategy 11. Completion and approval of Asset Management Plans 3 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.08.02 Plan for appropriate investment in capital works and remedial maintenance over the lifespan of each property asset. Q3 25/26: Property & Estates Asset Management Plan moving into delivery with resource allocated. Q2 25/26: Q2 25/26: Property & Estates Asset Management Plan approved by Council. Fleet Asset Management Plan and Digital Asset Management Plans are Chief Officer *Place; 30-Apr-2025 33% Page 234 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL under development and are key parts of finalising the Capital Plan Prioritisation exercise. Q1 25/26: Asset management plan for Property & Estate drafted. Due to be finalised and issued to Council in Q2. Updated governance for asset management included. Asset management plans for Fleet also approved at Council. Q3 24/25: Condition Surveys of Learning Estate (excl PPP) has concluded. Q4 presentation to Elected Members. Backlog repairs continue. Q1 24/25: Condition Surveys continue, with Learning Estate (excl PPP) expected to be concluded by end December 2024 to inform capital investment proposal. SRP.R A.08.05 Learning Estate Strategy Q3 25/26: Significant progress on SRP, with report to Council to follow in Q4. Q1 25/26: Learning Estate Strategy is currently being implemented with the focus on the delivery of the LEIP funded projects of Mayfield, Beeslack and Penicuik. The Shawfair Campus project has been approved and design is being developed. Other non LEIP funded projects have started or are in planning such as Bilston PS & Mauricewood PS. Updated roll projections (SRP) will inform future strategy planning. 30-March 2026 50% SRP.R A.08.06 Asset Management systems Q3 25/26: Property & Estates Asset Management Plan moving into delivery with resource allocated. Q225/26: Q2 25/26: Property & Estates Asset Management Plan approved by Council. Fleet Asset Management Plan and Digital Asset Management Plans are under development and are key parts of finalising the Capital Plan Prioritisation exercise. Q1 25/26: Asset management plan for Property & Estate drafted. Due to be finalised and issued to Council in Q2. Updated governance for asset management included. Fleet Replacement Programme approved. Head of *Development; 31-Mar-2025 50% Page 235 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.22 Cost of Living Crisis Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.22 Risk cause The UK is currently facing an unprecedented storm of increasing prices, bills and tax. A 40-year high inflation rate of 9% is the main driver of the cost-of- living crisis which has outstripped wage and benefit increases. Risk event Rapid ongoing rise of energy prices as well as food and drink prices. Risk effect The impact on households is already being noted with 87% of adults in the UK reporting an increase in their cost of living in April 2022 (Office for National Statistics; Francis-Devine et al, 2022). The price rises will impact low-income households the hardest as a larger proportion of their bills are on energy and food. Chief *Executive; Director *Health and Social Care; Executive Director *Place 1. Council Cost of Living Task Force to oversee the Council’s response to the crisis 2. Allocation of LACER funding to support those most affected 3. Strategic Evaluation Partner appointed to create poverty profile 4. Community Planning Partnership has established a Midlothian Strategic Poverty Prevention Group co-chaired by Council Leader and Director of Public Health 5. New Child Poverty chair and lead appointed (Executive Director Children, Young People and Partnerships) 6. Child Poverty self-evaluation underway with Improvement Service 3 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.22.1 Cost of Living Task Force Q1 23/24: Meetings continuing. Chief *Executive; 31-Mar-2024 100% Page 236 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.23 Counter Terrorism – Compliance with Legislation Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.RR.2 3 Risk cause Current or new legislation applying to Midlothian Council. Lack of capacity to resource the statutory obligations. Risk event Council and/or Services not identifying all applicable actions. The CONTEST and Prevent action plans fall short of what is required Risk effect Council failing to meet its statutory duties, potentially resulting in a negative impact on the safety of employees, service users and visitors to Council facilities. Reputational impact of not meeting statutory duties. Chief Officer Children’s Services, Partnerships and Communities 1. There is a CONTEST Lead and Depute (Single Point of Contact (SPOC)) in place. These individuals are also the nominated Prevent SPOC and Depute SPOC. 2. There are designated, trained officers available to Chair Prevent related case conferences (Prevent Multi-Agency Panel). 3. There is a Midlothian CONTEST Group chaired by the Chief Officer Children’s Services, Partnerships and Communities. Membership includes representatives from services in both Council Directorates and the Midlothian Health and Social Care Partnership plus key external partners. Terms of Reference are in place. 4. Executive Directors, Chief Officers and Heads of Service are responsible for ensuring that their services comply with allocated actions and identifying any concerns and additional actins required. 5. An annual report on CONTEST activities is submitted to the Corporate Management Team. 6. Prevent assurance Statements are required by the Home Office and Scottish Government every two years. 7. Scottish Government may also require additional CT reports at various times. 8. Relevant information and updates received from external partners and organisations are disseminated to CONTEST Group members and others as appropriate. 9. E-learning CONTEST related modules, including Prevent products are Mandatory. In-person and written briefings are available to other staff groups who do not have access to e- learning or for whom the full briefing is not appropriate. 3 4 Risk Code Related Action Related action latest note Managed By Due Date Status SRP.RA.23. 01 Review and implement the recommendations from the Prevent Assurance 2025 process. Q2 25/26: Feedback with recommendations have been received from Home Office. Q4 24/25: The Home Office is due to provide feedback on the Midlothian Council Prevent Assurance 2025 submission. Communication during the process indicated that guidance would be given in respect of at least one of the assessment areas. Chief Officer Children’s Services, Partnerships and Communities June 2026 0% SRP.RA.23. 02 Terrorism (Protection of Premises) Act 2025: Implement the requirements of the Act as they become clear through Government guidance. Q4 24/25: New legislation. The Terrorism (Protection of Premises) Act 2025 (also known as Martyn’s law) received Royal Assent on Thursday 3 April. The Government intends for there to be an implementation period of at least 24 months before the Act comes into force. This period will enable those responsible for premises and events to Chief Officer Children’s Services, Partnerships 2027 0% Page 237 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL have sufficient time to understand their new obligations, and to plan and prepare accordingly. Whilst those that fall within scope of the Act may wish to consider the requirements, there is no requirement to comply with them until the legislation comes into force. The Home Office will publish statutory guidance during the 24-month implementation period. and Communities SRP.RR.04 Employee performance Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.04 Risk cause Employees not suitably trained/developed for the roles required of them. Limited availability of qualified practitioners in certain sectors. Change program not informed by all key stakeholders. Ageing work force. Employees unclear on expected behaviours. Employees constrained to innovate as a result of management practice. Employee productivity rate below the required level because of ineffective use of the People Policies particularly Maximising Attendance. Salaries in some functional areas lower compared to other LA’s resulting in recruitment issues particularly with trying to recruit experienced staff. Risk event Employees not engaged/consulted as part of organisational transformation. Experienced employees leaving the organisation. Inability to recruit suitably qualified / trained staff to fill vacancies negatively impacting on remaining workforce. Unacceptable behaviours demonstrated by employees. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; HR Strategic Lead; Chief Officer Young People and Partnerships Over-riding risk control measure = Focus on having the right people, here, healthy, performing, behaving and well led via effective utilisation of the workforce strategy and accompanying action plan. Approval of the Council’s Workforce Strategy 2024-2034 which focuses on the thematic areas below: Attendance / Wellbeing 1. Continuing implementation of the Wellness@Midlothian agenda. 2. Creation of an Employee Health and Wellbeing Strategy and supporting policy. 3. Maintaining the Healthy Working Lives Gold Award. 4. Proactive use of Occupational Health, Midlothian Physiotherapy, Employee Assistance Programme and the Workplace Chaplaincy Service. 5. Change of EAP supplier to ensure provision of best possible service. 6. Development of progressive People Policies. 7. Roll-out of mental health training for staff and managers. Performance 1. Service-level workforce plans. 2. Structured, robust, well established ‘Making Performance Matter’ Framework where expected standards of behaviour and Council values are re-enforced. 3. Continued re-enforcement of all People Policies involving various communication methods. 4. Development of a suite of management information to ensure Service Managers are informed e.g., turnover, absence levels/reasons etc. Organisational Change 1. Policy for Organisational Change includes strong emphasis on early engagement of employees. 3 4 Page 238 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Stated organisational culture not consistently reinforced by managers. Poor employee performance will stifle transformational change. Risk effect Difficulties recruiting the right staff. Challenges retaining quality staff. Low skill levels. Low morale, especially during change. High absence rates, loss of experience in service areas. ‘A Great Place to Grow’ our values including respect, collaboration, pride and ownership not realised, potentially resulting in missing the opportunity to capitalise on the abilities, experience and ideas of team members. Poor employee performance will Exacerbate the financial challenge. 2. Redeployment Procedure to ensure maximum chance of successful redeployment. Conduct 1. Resolution Policy encourages early intervention of workplace issues. 2. Professional standards and values build into the induction process and management development programme. Communication 1. A range of initiatives to keep staff informed of change (Chief Executive’s weekly email, Connect, All staff emails, tailored team briefings etc. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .02.04 Development and Delivery of the Council’s Workforce Strategy 2024-34 including analysis of future workforce requirements, gap analysis and gap closing strategies, and performance measures and target setting. Q1 25/26: Workforce Planning workshops completed with HR/OD team. Next session with CMT scheduled in September then onwards to Council Senior and Service Managers for full rollout. Q4 24/25: Council approved the Workforce Strategy 2024-2034 in December 2024. Work progressing on the delivery of the first three years through an agreed action plan. Acting HR Strategic Lead appointed. Two interim posts from BTB funding are being progressed for Talent and Reward. Q1 24/25: Workforce Strategy in development and expected to be presented to December Council with Action Plan for approval. Audit Scotland external audit on workforce and digital to be presented to Audit Committee September 2024. Chief Officer Corporate Solutions 31 Dec 2027 25% SRP.RA .02.05 Recruitment challenges in Procurement Service leading to contract management pressures and backlog in procurement exercises Q1 25/26: Procurement Manager in place. Additional Procurement Assistant resource (fixed term) onboarded August 2025. Category management realignment agreed and handover in progress. Business partnering model to commence in September 2025. Contract management framework drafted and in review. Contract register updated quarterly and published online. Pipeline in development for each category. Chief Officer Corporate Solutions 31 Dec 2025 10% Page 239 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Q4 24/25: Procurement Manager appointed to start on 1 June 2025. Chief Officer Corporate Solutions to implement an improvement plan and revised work plan for the service and develop business case for appropriate resourcing. SRP.RR.07 Care at Home Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.07 Risk cause Internal and External providers of Care at Home services unable to meet service and quality requirements as a result of a lack of capacity. Risk event Capacity of Community Support outstripped by demand. Risk effect There is a risk that patients will have their discharge delayed because there is insufficient community supports to enable timely discharge leading to deterioration in their health, beds being blocked and elective operations being cancelled. Head of *Adult and Social Care; Director *Health and Social Care 1. Care at Home winter assurance plan and business continuity plan complete 2. Development of Care at Home Service Improvement action plan 3. External commissioning complete and ongoing contract monitoring in place 4. External provider audits complete 5. Re-established Multi-Agency Quality in Care at Home quarterly review meetings jointly with East Lothian 6. Weekly provider meetings in place 7. Additional locum team members and contracts with agency staff in place 8. Daily discharge meeting with Multidisciplinary and Multi-agency team planning to plan and coordinate discharge to ensure care at hone support in place 3 4 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.07.01 Independent review of adult and social care Q3 24/25: Scottish Government announced in January 2025 that they will not be proceeding with the National Care Service. Q2 24/25: The Scottish Government has initiated a pause on the development of the NCS. Head of *Adult and Social Care; Chief *Executive; 31-Jan-2024 100% Page 240 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.10 Governance and Standards in Public Life Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.10 Risk cause Code of conduct for Members and employees’ actions falling short of International Standards. Risk event Failure in openness, accountability, clarity. Risk effect Service, partnerships and project outcomes not achieved. Non- compliance with conduct standards and reduction in standards in public life. Legal *and Governance Manager; Chief *Executive; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions 01 Annual Assurance Statement. 02 Standing Orders 03 Scheme of Administration 04 Scheme of Delegation 05 Elected Member Code of Conduct 06 Induction programme for new members and ongoing learning and development programme 07 Employee Code of Conduct 2 4 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .03.05 Review of Standing Orders, Scheme of Administration and Scheme of Delegation Q4 24/25: Standing Orders and Scheme of Administration updated and approved at Feb 2025 Council. Q1 24/25: Workplan presented and agreed by SOWG in April 2024. Some changes to SOs and Scheme of Administration presented and approved by Council in May 2024. Legal *and Governance Manager; Chief Officer Corporate Solutions; 28 Feb 2027 20% SRP.RA .10.03 Review of the employee onboarding and induction programme Q1 25/26: Content for online induction now finalised – in design phase prior to launch in Autumn. Next step is face to face induction programme. Q4 24/25: Work ongoing to finalise the refreshed induction programme and onboarding process Chief Officer Corporate Solutions 31-Dec-2025 5% Page 241 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL SRP.RR.12 Internal Control Environment Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.12 Risk cause Work procedures/process inadvertently create the capacity for fraud and waste to occur. Internal Controls requiring more time, effort or cost than the risk being managed. Mangers failing to follow procedures and keep systems updated with accurate information. Risk event Persons exploiting opportunities to commit fraud. Waste and errors Changing risk landscape associated with remote working solutions. Risk effect Waste and loss Risks over managed with risk controls costing more than the potential loss being managed. Increased opportunity for fraud or financial loss has direct impact on management information. Has adverse effect on service performance. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Services have been prompted to consider fraud and waste within Service Risk Registers. 2. Risk Management Guide provides direction on the need to balance time, effort and cost against benefit of risk controls. 3. Internal Audit examine internal control arrangements based largely on the risk registers. 4. Corporate Fraud team in place who assist managers to undertake fraud risk assessments in their areas (focused on priority areas) and provide advice and guidance on fraud related matters. Active participation in the National Fraud Initiative to investigate matches. 5. Whistleblowing Policy and Counter Fraud Policy in place (subject to review) with whistleblowing channels available to report concerns (anonymously if required). 6. Internal and external assurance. Annual Governance Statement which involves obtaining assurance from Management over controls in their Service. 7. E-learning for staff to complete mandatory training for fraud awareness. 8. Regular updates to Audit committee on progress with recommendations made by Internal Audit. 9. Remind staff to declare secondary employment/outside interests and gifts & hospitality 10. Induction for all new employees (with service exceptions), including legal, HR, procurement, health and safety. Control at entry to organisation. 11. The Integrity Group continues to meet to improve the Council’s resilience to fraud, corruption, theft and crime (including cybercrime), maintaining proper risk management, governance and internal control processes and systems to ensure probity in systems and operations, and mitigation of risks, including the prevention, detection and resolution of fraud and irregularities. Management is also responsible for checking that the arrangements and controls are operating effectively and obtaining assurances from internal compliance, risk, inspection, quality, and control functions. 2 3 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.12.04 Review of Serious Organised Crime (SOC) group Q2 25/26: A recent change in Police management covering this area has meant that progress has been delayed. Anticipating re-engagement in Q3. Chief Officer *Place; Health, Safety & 31-Mar-2025 50% Page 242 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Q3 24/25: Draft Strategy devised. Regulatory safeguards/actions progressing through Licensing. Q1 24/25: Initial meeting with Police is planned to discuss strategy. Resilience Manager SRP.RR.11 Corporate Policies and Strategies Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.11 Risk cause Policies may not match the aspirations of the Council's Strategic priorities or cultural perspective. Risk event Policies not monitored may become out of date. Policies not reviewed to ensure alignment with strategic priorities. Risk effect Policies not monitored could result in non-compliance with legislation Policies not aligned to strategic priorities will inhibit rather than support implementation of strategic priorities. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Single Midlothian Plan providing overarching direction 2. Service plans aligned to Single Midlothian Plan. 3. Leadership team to ensure correct approaches are adopted to get the right results. 4. Strategic housing investment plan, submitted to Scottish Government. 5. Capital Strategy 6. Integrated Joint Board (IJB) Plan 7. IJB Strategic needs assessment 8. Midlothian Local Development Plan 2017 – the Council’s corporate spatial strategy. 2 3 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .02.04 Transformation Blueprint 2023 to 2028 Q3 25/26: Refer to SRP.RA-02.08 Q2 25/26: Refer to SRP.RA-02.08 Chief *Executive; Chief Finance Officer; 30-Jun-2028 20% SRP.RA .03.07 Review of policy and creation of a policy register Q1 25/26: See comments earlier in SRP. Q4 24/25: Policy list presented to CMT May 2025 for CMT to review and feedback Chief Officer Corporate Solutions 31-Dec-2025 10% SRP.RA .11.05 Antisocial Behaviour Policy Q1 24/25: Member Briefing on Housing and Antisocial Behaviour to be prepared and presented during Q2, with report to Council to follow. Chief Officer *Place; 31-Dec-2024 0% Page 243 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL Strategic Opportunities SRP.OP.08 Capital Projects - Housing Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.08 Cost of delivering Affordable Housing Supply Programme has risen at faster rate than available grant to Midlothian and continued high build costs will affect ability to deliver housing programme. Policy requirement to deliver 25% affordable on new housing sites under significant pressure due to grant level not growing with housebuilding rate. More sites will be unable to delivery subsidised homes for rent due to shortfall in grant. Projects progressing, with Timeline, Budget, Risk and Resource categorised as parameters on a RAG status, with any Red classifications identified and reported. Executive Director *Place; Head of Development 1. Edmonstone Road, Shawfair – Timeline, Budget and Risk impacted with Stewart Milne entering administration. However, site now amber due to appointment of Dundas Building to finish site. Now on site. 2. Newtongrange Former Pool & Church Hall sites. Requirement to deliver 3D modular units on site. V limited Scottish suppliers for 3D due to Connect going into administration. VfM to be examined in tender report in Q2. Phase 5 housing programme has been reviewed to ensure affordability within the Housing Revenue Account. Grant level now restored which is to be used for acquisitions to address temporary accommodation pressures. However, high level of housing delivery and restored grant insufficient to support all housing sites to deliver subsidised 25% affordable homes. Timeline Budget Risk Resource A A A G A A A G SRP.OP.09 Capital Projects – Transport, Net Zero & Infrastructure Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.09 Cost of delivering enabling infrastructure projects has risen, resulting in significant funding gap emerging. Expansion of scope by Transport Scotland and restrictions on timing of ecology surveys driving further cost and timing risks. Projects progressing, with Timeline, Budget, Risk and Resource categorised Executive Director *Place; Head of Development 1. A701 Relief Road 2. A701 Sustainable Trasport Corridor 3. A701 Straiton Junction Improvements For all highlighted projects, estimated cost significantly exceeds budget available to deliver project. For all highlighted projects, addressing requirement for investment in A701 corridor in phases with prioritisation applied. Bush Loan Junction progressing ahead of remaining programme fully funded by Edinburgh and South East Scotland City Regional Deal (ESESCRD) funding. Timeline Budget Risk Resource R R R G R R R G R R R G Page 244 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL as parameters on a RAG status, with any Red classifications identified and reported. SRP.OP.10 Capital Projects – Children, Young People & Partnerships Estates Programme: Primary Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.10 Projects progressing, with Timeline, Budget, Risk and Resource categorised as parameters on a RAG status, with any Red classifications identified and reported. Executive Director *Place; Executive Director CYPP; Head of Development 1. Kings Park PS Extension & Refurbishment: No available budget to undertake extension. Condition and suitability of school to be addressed. 2. Rosewell PS Extension: No available budget to undertake extension. Condition and suitability of school to be addressed. 2 modular classes were added in August 2024. 3. Mauricewood PS Extension & Refurbishment: Rising roll and catchment review requires investment in school to address capacity and suitability. Limited budget available. Design team appointed to develop investment in school that aligns with budget available from Developer Contributions. Tender for 6 class extension and additional games hall due to be returned in February and a report will be brought to the relevant governance board. Timeline Budget Risk Resource A R R A A R A G R R A A SRP.OP.09 Capital Projects – Children, Young People & Partnerships Estates Programme: Secondary Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.09 Projects progressing, with Timeline, Budget, Risk and Resource categorised as parameters on a RAG status, with any Red classifications identified and reported. Executive Director *Place; Executive Director CYPP; Head of Development 1. Beeslack HS Replacement: Contractor appointed. Due to rising market costs a redesign process is underway. Timeline Budget Risk Resource R A A G SRP.OP.09 Capital Projects – Regeneration Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.10 Projects progressing, with Timeline, Budget, Risk and Resource categorised Executive Director *Place; Timeline Budget Risk Resource Page 245 of 246
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STRATEGIC RISK PROFILE, Q3 Oct-Dec 2025 OFFICIAL as parameters on a RAG status, with any Red classifications identified and reported. Head of Development 1. Vogrie Changing Places: Warrant submission now complete and awaiting determination before install can go ahead. Part of wider Vogrie Renewal Strategy. 2. Destination Hillend: Alpine Coaster delivered with access and parking infrastructure and Coaster now open. Project absorbed risk and contingency. Updated brief issued to SSM for high level site planning and to brief Members in Q2. 3. Hopefield Industrial Estate: Updated financial model required. Cost plan for upgrade to infrastructure being developed 4. Dalkeith Asset Rationalisation Programme: Decant of staff to Fairfield House complete. Contractor appointed however project now overbudget and being rescoped. R A R A R R R A R A A G A R A G SRP.OP.04 City Deal Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.O P.04 South East Scotland Region City Deal - a bid for funding to Scottish and UK Governments to accelerate economic growth through investment in infrastructure/ housing/ skills and innovation. 200 Council Houses linked to the City Deal. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Maintain strong Midlothian involvement through the City Deal governance structure. 2. Midlothian City Deal Key Officer (Internal) Group. 3. Securing best arrangements for Midlothian through close liaison with partners and conclusion of business cases. 4 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.O P.04.02 Realisation of outcomes of respective workstreams Q2 25/26: Work continues on the relevant programmes. Executive Director *Place 31-Mar-2026 10% Page 246 of 246