Public Accounts Committee Report on

REPORT

The Public Accounts Committee

The primary function of the Public Accounts Committee is defined in Standing Orders[1] as the review of reports by the Comptroller and Auditor General regarding –

· The audit of the Annual Accounts of the States of Jersey and to report to the States upon any significant issues arising from those reports;

· Investigations into the economy, efficiency and effectiveness achieved in the use of resources by the States, States funded bodies, independently audited States bodies (apart from those that are companies owned and controlled by the States), and States aided independent bodies;

· The adequacy of corporate governance arrangements within the States, States funded bodies, independently audited States bodies, and States aided independent bodies, and

· To assess whether public funds have been applied for the purpose intended and whether extravagance and waste are being eradicated and sound financial practices applied throughout the administration of the States.

The Public Accounts Committee may also examine issues, other than those arising from the reports of the Comptroller and Auditor General, from time to time.

The Public Accounts Committee represents a specialised area of scrutiny. Scrutiny examines policy whereas the Public Accounts Committee examines the use of States’ resources in the furtherance of those policies. Consequently initial enquiries are made of Chief Officers rather than Ministers. This is not to say that enquiries may not be made of Ministers should the reports and recommendations of the Public Accounts Committee be ignored.

The work of the Public Accounts Committee is ongoing rather than on a one-off basis and the Committee will return to topics previously examined in order to evaluate whether recommendations have been followed or procedures improved. If such a follow-up is unsatisfactory then the Committee may decide to hold further public hearings in order to identify the reasons for the lack of progress.

The current membership of the Public Accounts Committee consists of –

States Members	Independent Members
Deputy Sarah Ferguson of St. Brelade No. 1 (Chairman)
Deputy James Reed of St. Ouen (Vice-Chairman)	Mr. Tony Grimes
Deputy Alan Breckon of St. Saviour No. 2	Advocate Alex Ohlsson
Connétable Tom de Feu of St. Peter	Mr. Chris Evans
Connétable Daniel Murphy of Grouville	Mr. Roger Bignell
Senator Leonard Norman	Mr. Martin Magee

Contents

Section One: Background. 4

Setting the Scene. 4

Spending Review.. 4

Particular Issues raised in the Comptroller and Auditor General’s report 4

Savings. 4

Management and Control 5

Recategorisation of Savings. 5

Press Release. 5

Section Two: Recommendations. 6

Section Three: Findings. 8

Section Four: Examination of the Evidence. 10

Savings. 10

Sustainability. 14

Management and Control 15

Press Release. 20

	Section One: Background
	Setting the Scene
1.	The Comptroller and Auditor General (CAG) has published 2 reports on government expenditure in Jersey. The first, ‘States’ Spending Review – Setting the Scene’, detailed the development of expenditure in recent years, and identified trends in that expenditure. This represented groundwork essential for the production of his second report ‘States’ Spending Review – £35 million Cost Reductions’, which examined the effects of recent attempts to reduce expenditure by various means.
2.	In his ‘Setting the Scene’ report, the Comptroller and Auditor General demonstrated that government expenditure in Jersey tends to rise faster than the Retail Price Index, indicating a growth of expenditure in real terms[2]. The Comptroller and Auditor General identifies the general trend as an increase in government expenditure in buoyant economic periods, with a slowdown in expenditure growth associated with limited or non-existent growth in economic growth.
3.	In 2006, (the last year for which full information was available at the time of the Comptroller and Auditor General’s reports) government expenditure fell as a percentage of government income, and increased overall less than RPI, indicating a reduction in real terms. This represents the continuation of a trend that began in 2005^[3].
	Spending Review
4.	The Comptroller and Auditor General’s report on ‘£35 million Cost Reductions’ sought to identify and verify the reductions in expenditure claimed by the Executive.
	Particular Issues raised in the Comptroller and Auditor General’s report
	Savings
5.	The approach to savings was not consistent across all Departments.
6.	The definitions of savings were not consistent across all Departments.
7.	The evidence for the savings was not available from all Departments.
8.	There are doubts as to the sustainability of certain reductions in expenditure.
	Management and Control
9.	There was evidence of a lack of concerted corporate action in the management of finances.
10.	Measurement of Performance was not clearly defined.
	Recategorisation of Savings
11.	The result of these issues was that of the £35 million the Comptroller and Auditor General estimated that: · £21.9 million represents a reduction in expenditure · £1.5 million represents deferred expense · £5.8 million represents Corporate efficiencies · £4.06 million was a reduction in expenditure from other sources or from exogenous factors · £2.5 million arose from increased income.
	Press Release
12.	The Committee also considered the Press release regarding the £35 million savings in the context of the Report of the Comptroller and Auditor General.

	Section Two: Recommendations
13.	The Committee considers it vital that savings be represented for what they are, and that the public are not led to believe that they are all efficiency savings due to a lack of clarity.
14.	The Committee is concerned that there should be complete clarity in the terminology used in describing the reduction of expenditure and recommends that the definitions used by the Comptroller and Auditor General should be used in future and should be included in Financial Directions .
15.	The Committee would encourage the development of better procedures to identify the results of departmental efficiency savings and, again, would recommend greater clarity in their description.
16.	The Committee considers that, where demographic and exogenous trends are occurring, Departments should develop clear policies to cope with these.
17.	The Committee considers that the thinking behind the plan for Jersey Property Holdings was valid and is disappointed to understand that the required steps to move this forward were not yet complete. It considers that this should be addressed as a matter of urgency.
18.	The Committee would also encourage senior management to make a greater effort to involve middle level managers in the budgeting process and the discussion of efficiencies.
19.	The Committee is concerned at the rationale expressed by the Treasurer in that “reducing the bottom line means that savings have been made” and considers that this does not represent efficient or effective financial management. It also considers that the lack of a year end report on the effects of the reductions in expenditure has removed incentives to demonstrate effectiveness. It is pleased to note that this omission has been amended by the Chief Executive.
20.	The Committee agrees with the Chief Executive that the imposition of myriad targets is not helpful and leads to dysfunctional behaviour rather than sensible management. This is a view which is shared by the Comptroller and Auditor General as set out in his programme for 2007.[4] The Committee understands that the Comptroller and Auditor General will be preparing a report on performance management in due course and looks forward to that report.
21.	The Public Accounts Committee deplores the lack of clarity in the press release and recommends that greater care is taken in the descriptions used in press releases.

	Section Three: Findings
22.	The Committee noted that the Executive considers any reduction in the public funding requirements to be a saving. While the Committee approves wholeheartedly of reductions in public expenditure, it considers it vital that these savings be represented for what they are, and that the public are not led to believe that these are all efficiency savings due to a lack of clarity. User-pays services are still ultimately funded by the public, for instance.
23.	The Committee is concerned that there should be complete clarity in the terminology used in describing the reduction of expenditure and recommends that the definitions used by the Comptroller and Auditor General should be used in future.
24.	The Committee would encourage the development of better procedures to identify the results of departmental efficiency savings and, again, would recommend greater clarity in their description.
25.	The Committee is also concerned that the approach to savings is not part of a coherent strategy. The closure of St. Mark’s School, for example, is an effect of demographic changes and there should be a policy in place to address this.
26.	The Committee considers that the thinking behind the plan for Jersey Property Holdings was valid and is disappointed to understand that the required steps to move this forward were not yet complete. It considers that this should be addressed as a matter of urgency.
27.	The Committee also noted that there had been concerns over maintenance of States Property for some years. These were first highlighted by the Audit Commission in 2000. At that time the estimate of the spending on maintenance was £13.4 million but, from the comments made in this review, it appears that the allocated budgets retained in Departments are used as a “buffer” against spending pressures.
28.	The Committee considers that deferred costs are not genuine savings. The Comptroller and Auditor General’s definitions are quite clear and should be included in Financial Directions.
29.	The Committee would also encourage senior management to make a greater effort to involve middle level managers, such as the Heads of schools, in the budgeting process and the discussion of efficiencies.
30.	The Committee suggested to the Executive that there was considerably more clarity in respect of corporate cost reductions than those made at the departmental level. This led to a concern that, for instance, there could be no certainty that a saving made in one year was not included as an additional cost for a Department in a later year.
31.	The Committee notes that, in his report, the Comptroller and Auditor General has reviewed all the expenditure reductions publicised as savings. It is on that basis he has stated that only some £13.5 million of the FSR reductions in expenditure could be considered savings. Furthermore, although he considers that the there is solid evidence of the Corporate Efficiencies of £7.3 million, £1.5 million of these are attributable to Property Holdings and therefore mainly relate to maintenance and are probably not sustainable.
32.	The Committee is concerned at the rationale expressed by the Treasurer in that “reducing the bottom line means that savings have been made” and considers that this does not represent efficient or effective financial management. It also considers that the lack of a year end report on the effects of the reductions in expenditure has removed incentives to demonstrate effectiveness. It is pleased to note that this omission has been amended by the Chief Executive.
33.	The Committee agrees with the Chief Executive that the imposition of myriad targets is not helpful and leads to dysfunctional behaviour rather than sensible management. This is a view which is shared by the Comptroller and Auditor General as set out in his programme for 2007.[5] The Committee understands that the Comptroller and Auditor General will be preparing a report on performance management in due course and looks forward to that report.
34.	In light of this response, the Committee expressed concern that there was a lack of clarity as to where responsibility for savings lay. It was not certain, for instance, how the Treasurer’s ‘professional network’ could effectively report when until 2007 Chief Officers did not provide details of expenditure reductions made, even to the Chief Executive.
35.	The Public Accounts Committee deplores the lack of clarity in the press release. It cannot be said that there are £15 million in efficiency savings since, as the Comptroller and Auditor General states in his report, regarding departmental efficiencies, … In view of the paucity of the available information, it is difficult to describe the nature of the cost reductions that have been achieved (£8.393 million) save to note that budgets have been reduced and departments have largely lived within their budgets so that however it has been achieved there has been a reduction in spending.[6]

	Section Four: Examination of the Evidence
	Savings
36.	The Committee noted that the Executive considers any reduction in the public funding requirements to be a saving. While the Committee approves wholeheartedly of reductions in public expenditure, it considers it vital that these savings be represented for what they are, and that the public are not led to believe that these are all efficiency savings due to a lack of clarity. User-pays services are still ultimately funded by the public, for instance.
37.	The Executive defended its use of the term ‘cuts which States Departments are making to reduce spending’’[7] to encompass both FSR and efficiency savings together.
38.	The Fundamental Spending Review (FSR) process was devised in 2002 and implemented in 2003. It represents targeted reductions in States expenditure, agreed upon by a bargaining process between Departments. Cost savings usually reflect reductions in services provided by the States which were deemed to be of low priority. These reductions were linked to ‘growth requests’ for increased spending in other services. This was therefore a re-prioritisation of States expenditure. The Treasurer of the States gave this definition – “F.S.R. was not efficiency savings, in fact it is meant to be anything other than efficiency savings, it is political decisions.”[8]
39.	The method of implementing Fundamental Spending Review savings has created challenges to monitoring their success. The Comptroller and Auditor General notes that the Departments have freedom to utilise their budget as they see fit within the pre-agreed cash limits. Detailed expenditure outlines submitted to the States in Departmental Business Plans are indications of intention only. Therefore the States Assembly can only affect the overall expenditure for a Department.
40.	Efficiency Savings are reductions that allow the States to provide the same services at less cost. This might include centralising services and purchasing to gain economies of scale, for example. The efficiencies were divided between ‘Corporate Efficiency’ savings, which were to be made in centralised services such as human resources, information technology, procurement, etc., and ‘Departmental Efficiencies’. Departmental Efficiencies were allocated to the 10 non-trading Committees according to total expenditure after social benefits, grants and transfer payments were deducted.
41.	The Comptroller and Auditor General notes that there is a fundamental difference in the measurement of Corporate and Departmental Efficiencies. Corporate Efficiencies are well recorded, however – “For Departmental targets the States have not systematically collected information on how the efficiency savings have been targeted and achieved.”[9]
42.	The Executive broadly accepted the definitions used by the Comptroller and Auditor General to quantify FSR and efficiency savings. It was acknowledged that in some instances there was a lack of clarity as to how a reduction in expenditure should be categorised.
43.	The Comptroller and Auditor General, in his report ‘£35 million Cost Reductions’, expressed doubts that £4.064 million of the total expenditure reduction claimed by the Executive were in fact ‘savings’ achieved by Departments in a real sense. It was suggested that these reductions were in fact due to –[10]
	· Accounting adjustments	£379,000
	· Reduction in costs not arising from States action	£1,926,000