Appendix 1

Adjustments to service cash limits 2001/02

The table below shows the adjustments made to service revised cash limits as set out in the 2002/03 budget book, for subsequent technical policy changes, providing the basis against which under/overspendings are measured in Table 2 of the report.

Appendix 2A

Education

Revenue Expenditure 2001/02

Major variations in cash limited expenditure - underspending of £60,000

Appendix 2B

Environment

Revenue Expenditure 2001/02

Major variations in cash limited expenditure - underspending of £35,000

Appendix 2C

Policy and Resources

Revenue Expenditure 2001/02

Major Variations in Cash Limited Expenditure - overspending of £40,000

Appendix 2D

Recreation and Heritage

Revenue Expenditure 2001/02

Major variations in cash limited expenditure - overspending of £593,000

Appendix 2E

Social Services

Revenue Expenditure 2001/02

Major variations in cash limited expenditure - underspending of £295,000

Expenditure outside Service Cash limits Appendix 3

Expenditure outside service cash limits

Table 1 below provides a detailed schedule of the variations on budgets outside service cash limits, which is summarised in Table 5 of the report

Details of the variations are as follows:

Hampshire Fire and Rescue Authority (HFRA levy) (-)

The HFRA levy for 2001/02 of £36.081m, is in line with both the original and revised budgets for the year. However this takes account of an additional revenue contribution to capital of £164,000, allowing additional credit approval to be carried forward to 2002/03 to fund `Hot Fire' training units (£41,000) and either repairs to Copnor Fire Station or to contribute to other building maintenance of a capital nature (£123,000). The scope for making this additional revenue contribution within the revised budget arises from savings of £194,000 on pension costs offset by a small net overspend on other cash limited budgets.

Contingency provision (-£147,000)

A contingency provision of £1.630m was included in the revised budget, from which allocations of £1.483m to service cash limits have been made subsequently, leaving a balance of £147,000 unallocated. Table 2 below summarises the position:

Claims on the waste management contingency were £97,000 higher than forecast as a result of costs incurred relating to the collection and storage of refrigerators since 1 January 2002 of £112,000, which were not anticipated at the time the 2001/02 budget was set. Though the Government has agreed to provide additional revenue support grant for the period from 1 January 2002 to 31 March 2002, estimated at £120,000, the grant is not payable until 2002/03.

A sum had been earmarked in the contingency to enable customers to meet price increases from IT Services in line with corporate inflation assumptions, having received an increase of only 2.5% in the original budget for their IT budgets. The allocations agreed since the approval of the revised budget were £56,000 lower than the earmarked sum.

A report to the Executive member Policy and Resources in December 2001 identified that as a result of the precautions taken to avoid the spread of Foot and Mouth disease in Hampshire, that the Recreation and Heritage budget had had to absorb costs estimated at £376,000, mainly as a result of the loss of income at Manor Farm Country Park, Sir George Staunton Country Park and the outdoor centres. It was agreed that though Recreation and Heritage would seek to identify savings that could be made in the remainder of the financial year to offset these costs, that corporate resources would be earmarked to cover 50% (£188,000) of the overspend. In practice rather than allocate a sum to Recreation and Heritage from the contingency, it is proposed instead that the relevant share of Recreation and Heritage's overspending (£223,000) be written-off in the final accounts for 2001/02.

Capital financing charges - (-£156,000)

The savings of £156,000 against the revised budget are summarised in Table 3 below:

Base rate had fallen to 4% by November 2001 and remained at that level to the end of the financial year. Nonetheless the cost of short-term borrowing was marginally lower than forecast reducing the pool rate of interest from 5.92% in the revised budget to 5.87% and reducing interest costs by £160,000.

Interest on revenue balances (-£2,164,000)

Higher interest on balances is mainly a reflection of the extent to which internal resources were higher than anticipated. These internal resources are derived mainly from balances, earmarked reserves, provisions and deposits, together with the excess of creditors over debtors, and are difficult to forecast with precision. Savings of around £1m had previously been forecast and this has been enhanced by a saving of £0.3m on interest payable on purchase money, where occupation is taken of land usually for highway purposes in advance of the agreement of compensation, and interest is often accrued over a number of years. Savings in the revised budget, higher earmarked reserves than forecast, and the receipt of formula capital grant and non-devolved standards fund grant in advance of its use are all factors which have contributed to higher interest receipts.

Revenue contributions to capital (-£1,221,000 matched by an equivalent additional contribution to the general capital reserve)

The revised capital financing plan for 2001/02 required the use of revenue contributions to capital of £24.1m and allowed for a contribution of £2.7m to the capital reserve to finance capital payments in 2002/03 and later years. Item 4 on the agenda summarises the capital financing position in 2001/02 and identifies that revenue contributions of £22.9m will be required in 2001/02 to finance capital payments, enabling a further transfer of £1.2m to the capital reserve which is likely to be required for financing of capital payments in 2002/03.

Insurance provision (-£980,000 matched by a transfer to the insurance reserve)

£2m was added to the insurance premiums paid by Education and Social Services in 2001/02 to reflect the upward trend in liability claims in recent years. The assessed value of outstanding liability claims was £0.7m higher at 31 March 2002 than at the end of the previous year, but claims paid in the year were £1.7m lower than premiums, resulting in a £1m contribution to the revenue account. The figures are summarised in Table 4 below:

However although in an accounting sense there are no liabilities for which a provision is required in the accounts in respect of fire damage, there are nonetheless known commitments to be met in 2002/03, particularly in respect of the impact of the major fire at Beech Down primary school. In addition from 1 April 2002, the County Council's insurance arrangements have also been extended to cover major damage resulting from flood and storm damage, but without any increase in premiums. It is therefore proposed that the saving on the insurance provision is transferred to the insurance reserve.

Business rates (-£176,000 but matched by a transfer to the invest to save reserve)

Business rate savings of £176,000 against the revised budget arose mainly as a result of revaluations to Recreation and Heritage properties. The first call on any business rate savings is to repay the annual contribution of £75,000 from the Invest to Save reserve towards the cost of the staffing in the Estates Practice employed in investigating business rate valuations. It is proposed to transfer the savings in full to the invest to save reserve to meet costs incurred in 2001/02 and 2002/03 and part of the cost in 2003/04.

Magistrates' Courts Committee (-£48,000, but more than offset by reduced Government grant of £41,000, and a reserve transfer of £24,000)

Since the approval of the revised budget, the Hampshire and Isle of Wight Magistrates' Courts Committee has received additional budget allocations of £127,000 from the Lord Chancellor's department. The County Council's share of the 20% local authority contribution amounts to £17,000. Actual spending was £178,000 below the Committee's final cash limit and £51,000 below the revised budget. Net of contributions from the three other contributory authorities, the underspending against the revised budget is £48,000, largely offset by reduced Government grant of £41,000. The Lord Chancellor is expected to approve the carry forward of grant of £142,000 and it is proposed that the County Council's 20% contribution of £24,000 be earmarked to finance the additional spending in 2002/03.

Highways winter maintenance (£80,000)

The County Council's policy is to budget for winter maintenance on the basis of average spending at current prices in the previous four years, with any under/overspending at the year end being outside service cash limits. The previous budget monitoring report identified that spending in 2001/02 was likely to be very close to the revised budget as winter conditions had been fairly average. The final outturn produced a small overspending of £80,000 following the final assessment of salt use in the year and of contract claims.

Mandatory awards to students (£2,787,000 but offset by additional specific grant of £2,797,000)

Mandatory awards to students have now been almost entirely replaced by student loans. However disabled students continue to receive grants towards their special needs in addition to student loans and the cost of these grants was underestimated in the budget. As the awards are 100% grant-aided, the County Council's overall financial position is unaffected.

Doubtful debt provision (£23,000)

The County Council's policy is to make a provision against a proportion of debts which are more than one year old proving to be irrecoverable. The general provision in 2000/01 was £410,000, while in addition a specific doubtful debts provision has been made in the Social Services accounts. Based on an analysis of the age structure of non-Social Services debt an increase in the general provision to £433,000 is appropriate at 31 March 2002.

Specific grants (-£2,756,000)

The increase of £2,756,000 in specific grants comprises:

Appendix 4

Earmarked reserves as at 31 March 2002

Earmarked Reserves Annex 1 to Appendix 4

1 Introduction

Reserves take various forms but all have the common feature that they are sums set aside for future purposes even though the precise nature or timing of any expenditure may be uncertain.

Schools general reserve

The schools general reserve contains the balance of delegated budgets, which are unspent. Their use is determined by the governing bodies of the individual schools.

In aggregate schools in 2001/02 incurred expenditure of £6,085,000 less than their delegated budgets; increasing the reserve to £30.954,000 at the end of the year. The table below summarises the position over categories of school:

The average level of school reserves as a proportion of budgets increased from 6.2% to 6.9% during 2001/02 influenced by the significant additional direct funding made available by the Government during the course of the year and by schools' ability for the first time to carry forward devolved Standards Fund allocations for use in the summer term, which accounts for £1,249,000 of the increase in reserves.

Capital reserves

The general capital reserve assists in matching the timing of the availability of capital financing resources with the timing of capital payments for services. A transfer of £5,015,000 to the capital reserve in 2001/02, leaves a balance of £21,463,000 in the reserve at 31 March 2002, the majority of which is likely to be required to finance capital payments in 2002/03.

A separate reserve has been established to reflect the County Council's commitment to transfer part of its basic credit approval in 2002/03 or subsequent years to other local authorities as set out below:

Trading accounts

These reserves relate primarily to business units operating within the County Council in accordance with Financial Regulation 20, which have authority to carry forward planned under/overspendings to the following year. Reserve balances may be used to cover potential future losses, to minimise future charges for services or for approved investment purposes. Trading results and proposed transfers to and from reserves have been reported to the relevant executive member.

The business units which formerly operated under Direct Service Organisation (DSO) legislation (cleaning, catering and transport) generated a deficit of £89,000 in 2001/02. Allowing for the earmarking of depreciation charges (+£51,000) and the financing of capital investment (-£43,000) the reserve balance is reduced by £81,000 to £169,000 at 31 March 2002.

County Supplies achieved a surplus of £130,000 in 2001/02, and after allowing for the earmarking of depreciation charges (£10,000) and the financing of capital investment (-£29,000), the reserve balance has increased to £818,000 at 31 March 2002.

IT Services has a reserve deficit of £957,000 at 31 March 2002, a smaller deficit than was originally anticipated. The deficit arises from the investment in IT2000 which will be recovered in future charges to services over the period up to 2003/04.

The services to schools trading units generated a surplus of £333,000 in 2001/02, as compared with a small forecast deficit. After allowing for the final repayment of £100,000 to compensate for the use of business unit surpluses to support the Education budget in earlier years, the reserve balance has increased to £1,275,000 at 31 March 2002

Separate reserves are also maintained for Printing, Caretaking and Cleaning, Arts Marketing and River Hamble trading accounts.

Designated underspending

This reserve was established to enable service underspendings to be carried forward to provide additional resources for the relevant service in a future year. The reserve also incorporates underspendings in the County Council's contribution to the HFRA and Magistrates' Courts Committee which the County Council has decided to earmark to meet anticipated future expenditure. In view of the proposal in the Local Government Bill to establish HFRA as a separate precpting authority, the retention of a separate reserve by the County Council to meet future HFRA pension liabilities is no longer necessary and it is proposed to transfer the balance of the reserve to the revenue account in 2001/02. The Education reserve includes for the first time the County Council's contribution to non-devolved Standards Fund programmes where it is proposed to utilise matching 2001/02 Standards Fund grant in the first five months of 2002/03, as now permitted by the DFES. The table below summarises the movements in the reserve balance during 2001/02:

On street parking

The on street parking reserve represents the County Council's tax base share of surpluses derived from on street parking charges made in Southampton (principally) and Portsmouth prior to Local Government Reorganisation (LGR). The use of these funds is restricted in the main to the support of schemes for off street parking.

The County Council has agreed to make a contribution of £2.3m towards the cost of a proposed multi-storey car park at Lower Banister Street, Southampton, financed from the reserve. The contract for this project was let just prior to 31 March 2002. The County Council's capital programme makes provision for the use of £1.8m from the reserve to finance parking schemes in Hampshire.

Insurance reserve

As the County Council retained responsibility for all liabilities relating to events occurring before Local Government reorganisation in the former County area, a reserve was established at 31 March 1997 of £5.0m (based on an assessment of unknown liabilities incurred but not recorded) at that date. As the cost of paying claims and providing for known liabilities in the subsequent four years has exceeded the `premiums' paid by committees, the reserve has been utilised to finance this shortfall. Further contributions to the reserve were made in 1999/00 and 2000/01, to enable a reserve of £4.0m to be carried forward to 2001/02.

A further contribution of £980,000 is proposed in 2001/02. This will ensure that the reserve is sufficient to cover fire reinstatement costs which are already committed, and to provide a reserve against adverse trends in liability claims, and the cost of major flood and storm damage which are covered by the County Council's insurance arrangements from 1 April 2002.

Invest to save reserve

The decision to establish an invest to save reserve was taken during 1999/00 and an initial reserve contribution of £8,184,000 was approved. Its aim is to provide a source of funding for investment which will generate future cash savings to the County Council, which can be recycled back into the reserve. Expenditure of £4,129,000 was charged to the reserve in 2000/01, resulting in a balance of £4,055,000 being carried forward to 2001/02.

The table below summarises the movements in the reserve balance during 2001/02:

Other reserves

The Segensworth unit factories reserve is derived from contributions from tenants towards future major repairs.

The Historic Publications reserve was established to meet the cost of publishing volumes in the Hampshire Papers and Portsmouth Record series, which vary significantly from year to year.

The microfilming registers reserve is held for the effective archiving of registration records.

Reserves were established in 1999/00 to finance costs associated with the County Council's new duty to promote the economic, social and environmental well-being of Hampshire and to meet job evaluation implementation costs arising from the single status agreement. A further contribution of £250,000 was made to the job evaluation reserve in 2001/02 to finance consultancy costs and expenditure of £167,000 was financed from the reserves during the course of the year.

Appendix 5

Treasury management activities 2001/02

Introduction

The Treasury Management Policy Statement adopted by the County Council in December 1992 requires an annual report on the exercise of the treasury management function to be presented in July of each year.

This report summarises the main aspects of the management of the Council's debt and lending in 2001/02 and in particular sets out:

· the Council's external borrowing requirement in 2001/02

· the economic background

· types of borrowing used

· a comparison of the composition of Consolidated Loans Pool (CLP) debt outstanding at 31 March 2002 with that for the previous year.

External borrowing requirement in 2001/02

The Council's external net borrowing requirement depends on:

· the level of borrowing required

· less the availability of internal balances.

The level of borrowing required for capital expenditure amounted to £27.8m in 2001/02 which was determined as follows:

As a result, despite an increase in internal funds of £18.4m, the level of external borrowing increased by £9.3m the following table shows:

External borrowing

At its meeting in February 2001 the County Council set limits on total and temporary external debt of £360m and £240m respectively and borrowing levels remained within these limits during the year.

Long-term borrowing

The Policy and Resources Committee approved a treasury management strategy for 2001/02 in February 2001. Until just before that meeting, base rates had been stable for over a year at 6%. Expectations were that rates had peaked and that they would fall gradually over the following year to March 2002. The forecasts proved to be correct and, as inflationary expectations receded, there were seven base rate cuts between February and November 2001, when they fell to their current level of 4%.

The Committee agreed the following strategy:

· long-term and short-term rates to be closely monitored.

· long-term fixed-rate borrowing to be considered if long-term rates stand at 5% or below.

· long-term fixed-rate borrowing to be considered at rates higher than this if clear signs of a rising trend occur.

Long-term rates had been falling over the year to February 2001. At the time of last year's meeting 25-year rates stood at 4.75%. They were expected to stay relatively stable over the year to March 2002. Throughout the year 25-year money was available from the Public Works Loan Board at rates fluctuating between 4.5% and 5.375%. No clear trend developed either up or down.

In February 2001 the Committee agreed a guideline figure for long-term borrowing in 2001/02 of £17m to maintain the balance between fixed and variable-rate debt. Loans matching this figure were taken during the year in line with the agreed strategy as follows:

The average rate payable on the long-term portfolio fell during the year from 7.5% to 7.2%. The current PWLB rate for over 20 years is 5.125%.

Temporary borrowing

Temporary external debt includes borrowing from the Pension Fund and Hampshire Police Authority. Borrowing from these two sources reached peaks of £46.9m and £21.8m respectively. Temporary borrowing from other sources reached a peak of £59.2m at the end of June 2001. Interest to the Pension Fund and Police Authority was paid based on the monthly average seven-day notice rate, which over the year averaged 4.55%. The average rate paid on borrowing from other organisations was 4.3%.

External lending

Surplus cash balances were lent out during the year to borrowers on the Council's approved list. The list is kept under continuous review to avoid the possibility of any capital loss. It currently includes the major clearing banks, two top building societies and eight highly rated European banks. Funds can also be lent to other local authorities.

The weighted average rate achieved on funds lent out temporarily was 4.64%.

The Cabinet should note that, with effect from April 2002, local authorities were given the power to invest in sterling money-market funds (MMFs) "with the highest rating for credit and volatility".

MMFs are triple-A rated (by recognised rating organisations such as Moodys and Standard and Poors). Organisations and funds with this rating offer exceptional financial security. This is illustrated by the fact that none of the established UK commercial banks currently has this rating. While triple-A rated institutions' creditworthiness may change, such changes are unlikely to damage their fundamentally strong position. MMFs are also highly liquid. Investments in MMFs are in effect call deposits. Funds can be in or taken out of such funds on any day as long as deals are struck by the daily dealing deadline, normally between 12 noon and 2pm.

MMFs also give complete capital security but provide yields generally higher than those available on call deposits on the traditional money market. (current yields are around 3.9%, just below base rate). This is because they are large pooled funds (most are over £1bn) that are able to invest in a whole range of money market instruments with maturities up to 13 months. Investors benefit when higher rates are available on longer-term deposits, but suffer no loss of liquidity.

Two MMFs have been chosen for use by both the County Council and Police Authority, and have been added to the lending lists of both. A total limit of £25m has been placed on the total deposited with each MMF (ie deposits placed at any one time by the County Council and Police Authority added together).

It is suggested that the Cabinet approve the addition of the institutional sterling MMF managed by Standard Life Investments, and that managed by J. P. Morgan Fleming, to its list of approved borrowers.

CLP debt outstanding

CLP debt outstanding represents the total indebtedness of the County Council on the acquisition and capitalised maintenance of assets not yet charged to the annual revenue accounts.

The following table sets out the balance of total indebtedness between long and short-term external borrowing and internal resources both at 1 April 2001 and 31 March 2002:

Appendix 6

Hampshire Pension Fund - 2001/02 accounts

Introduction

This report presents the Pension Fund accounts for 2001/02.

2001/02 accounts

A summary revenue account for 2001/02 is shown below with equivalent figures for the previous year.

Employees' contributions rose by 6.9% compared with the previous year. Pay increased generally by 3.5% from 1 April 2001. Contributor numbers rose during 2001/02 by 5.7%, including part-timers.

Employers' contributions increased by 9.3%. These are assessed as a proportion of employees' contributions which rose by 6.9%. The remaining difference is explained by an increase in short-term contributions for early retirements, due to higher average values, and by a capitalisation of compensatory added years in respect of former Magistrates Courts staff.

Transfer values received increased by 22.3%. The number received increased in 2001/02 by 19%, and the remainder of the increase resulted from bulk surrenders of AVCs from Equitable Life.

Pensions paid increased by 4.4%. The cost of pensions rose by 3.3% in mid-April 2001. The number of pensions in payment rose in 2001/02 by 2.7%.

There was a 15.4% increase in lump sums and benefits paid. These are based on final year's pay which rose in 2001/02 by 3.5%. The number of retirements rose in 2001/02 by 27.6%.

Transfer values paid rose by 19.4%. The number of transfer values paid increased in 2001/02 by 23%.

Costs of investment management and administration rose by 4.9%. The main factor was an increase in administrative costs associated with an 8% increase in the number of scheme members.

Investment income fell by 4.1%. Falling interest rates led to reduced income on the Fund's fixed interest and cash holdings.

The increases in employees' and employers' contributions and transfer values received were the major factors leading to a 2.8% increase in the surplus available for investment from £64.4m to £66.2m.

Net assets statement

The net assets statement (or fund balance sheet) is summarised below:

The market value of investments rose during 2001/02 by 3.7%. This is misleading as the cash balance fell during the year as the managers made net investments of over £100m. The overall fund balance fell by 1.8%. This reflects a second year of poor performance by most equity markets, following several years of good returns. Index returns in 2001/02 in the UK, US, Japanese and European equity markets were -3.2%, -0.6%, -20.8% and -7.4% respectively. Returns on fixed-interest stocks were better. Index returns in the UK and overseas were 1.6% and 0.3% respectively. The poor performance of equity markets led to a £47.5m reduction in unrealised market value, which is the difference between the Fund's market value and its book cost.

Annex 1 provides a detailed analysis of fund holdings as at 31 March 2002. Annex 2 contains a series of graphs showing trends in pension activities since 1976.

Recommendation

1 That the accounts for 2001/02 be approved.

Annex 1 of Appendix 6

Pension Fund investments

Summary of holdings on 31 March 2002

Appendix 7

Hampshire County Council

Assurance statement for the year ended 31 March 2002

Introduction

The Accounts and Audit Regulation 1996 require the County Treasurer to maintain an adequate and effective internal audit.

The County Treasurer employs an in house internal audit section to provide an independent and objective appraisal function for reviewing the system of internal control. It examines, evaluates and reports to Chief Officers and the County Treasurer on the adequacy of the internal control as a contribution to the proper economic, efficient and effective use of resources.

From 2002/03 The Code of Practice on Local Authority Accounting in the UK requires that the Chief Internal Auditor provides an independent opinion on the adequacy and effectiveness of the system of internal financial control operating in the County Council. The County Treasurer has sought to develop this for 2001/02 in preparation for the full requirement next year. To enable him to do this, an independent opinion on the adequacy and effectiveness of the system of internal control has been prepared for each department.

Responsibilities

It is a management responsibility to develop and maintain the internal control framework, and to ensure that resources are properly applied in the manner and on the activities intended. It is the responsibility of Internal Audit to form an independent opinion, based on reviews during the year, on the adequacy and effectiveness of the system of internal control.

Basis of opinion

The strategic and annual internal audit plans were prepared by the Chief Internal Auditor to take account of the characteristics and relative risks of the activities involved and were approved by the County Treasurer.

The internal audit plan has been delivered in accordance with the Auditing Practices Board's Guideline number 308, `Guidance for Internal Auditors.'

Work has been planned and performed so as to obtain all the information and explanations which were considered necessary in order to provide sufficient evidence to give reasonable assurance that the internal control system is operating effectively. However, this assurance can never be absolute. The most that the internal audit service can do is to provide reasonable assurance that there are no major weaknesses in the system of control.

Opinion

The County Council has an effective framework of control which provides reasonable assurance regarding the effective, efficient and economic achievement of the County Council's objectives.

Ejner Knudsen

Chief Internal Auditor

County Treasurer's Department

Hampshire County Council