THERE are “significant risks” to Merthyr Tydfil Council’s financial sustainability as it does not have a plan to address its medium term funding gap or a long term approach to improve its financial sustainability.
These are the findings of an Audit Wales report from its review into the financial sustainability of the authority.
The report going before the council’s governance and audit committee on Monday, December 9, says Audit Wales found that the council continued to take a “short-term approach” to addressing its financial position and lacks capacity at a senior officer level to develop a long-term approach to improve its financial sustainability.
The council has a three-year medium term financial plan (MTFP) covering 2024-25 to 2026-27 with a funding gap of £18.9 million over this period, but Audit Wales said the council had not identified how it would address this gap.
The council has previously had a recovery, transformation and improvement plan but Audit Wales said its approach continued to be focused on one year.
The report said that in setting the 2024-25 budget, the council relied on setting individual directorates savings targets and using reserves which “presents a risk to the council’s future financial sustainability.”
It said that the council was in the very early stages of considering its medium to long term approach to financial sustainability and is actively involving members in designing the approach.
It added that the council intended to have an agreed transformative approach to improve its financial sustainability by summer, 2024, ready for the 2025-26 budget and the next MTFP.
But Audit Wales said: “However, transformation plans can take a long time to develop, gain approval and implement to have the intended outcomes. The council will therefore need to factor in appropriate time lines to realise the benefits from this process.
Merthyr Tydfil Council used reserves to balance its 2023-24 budget and the Audit Wales report mentions that the council said it would not use reserves for the remainder of the MTFP period, recognising the unsustainable nature of this approach but the report said that the council used reserves to balance the 2024-25 budget.
In March, 2023, the council had £40.2 million of usable reserves which is equivalent to 28.2% of the council’s annual spending on services and Audit Wales said the level of reserves did provide the council with a degree of financial stability while it agreed a long-term approach.
But it said that, overall, the lack of strategic financial planning and capacity to drive forward a transformative approach at pace could lead to a continued short-term approach and unsustainable use of reserves, increasing its future financial challenge.
The report found that the council had a good understanding of its service pressures and modelled reasonable assumptions to inform its budget, but it did not adjust its assumptions over the medium-term which could impact the accuracy of the identified budget gap.
The council used “reasonable assumptions” in developing its MTFP, but it did not adjust these assumptions across the period of the MTFP, the Audit Wales report said.
Audit Wales also said that the council did not model its assumptions to enable a greater understanding of differing financial scenarios and that limited modelling risked impacting on the accuracy of the council’s projected medium-term funding gap.
It said the council did benchmark some assumptions with other councils and that the council had analysed and changed its approach to setting fees and charges.
Audit Wales said the council had a good understanding of its key budget pressures and was actively exploring opportunities to reduce these pressures and the risks they presented.
Audit Wales found that there was regular budget monitoring reporting to senior officers and senior members, but the council did not report on delivering its savings and without a long-term financial approach it could not monitor or report on its impact.
It said that as the council did not currently have a long-term financial strategy, there were no arrangements in place to monitor over the longer term but there was regular reporting to allow senior officer and senior member oversight of the council’s latest financial position.
Cabinet receives quarterly budget monitoring reports and the council’s budget board, consisting of cabinet members and senior officers, receive monthly reports and Audit Wales said this arrangement should enable early insight into any emerging financial challenges.
It found that there was no scrutiny involvement in in-year budget monitoring and although scrutiny committees could call-in reports, this rarely happened.
It also found that the council did not have a separate savings plan with all in-year savings, including those relating to increased fees and charges, being built into base budgets which it said meant it was more difficult for members to scrutinise and monitor delivery of its approved savings.
It found that when proposing savings, the council considered the impact of individual savings on people who used the services but did not report the potential cumulative impact of the savings on delivery of its well-being objectives or the impact on its communities.
Audit Wales makes some recommendations which include having a medium to long term approach to financial planning to reduce the unsustainable use of reserves, modelling a range of assumptions over the medium term to strengthen the accuracy of its funding gap and developing a savings plan to identify how it will meet its funding gap.
It also said that the council should develop reporting arrangements to provide members with the impact of its financial position, savings plan and MTFP on local communities and the delivery of its wellbeing objectives
