Contact: Jon Pittam, ext 7400

1. Summary

1.1 There is a small overall saving in both service cash limited budgets and other budgets, totalling £0.2m (0.02%).

1.2 The following decisions are sought:

(i) That the variations in service cash limited spending, as set out in Table 1, be approved

(ii) That adjustments and variations on other budgets as set out in Table 4 be approved

(iii) That contributions to and from earmarked reserves be made as set out in Appendix 4 and that the draft protocol set out in Annex 2 to the appendix be approved

(iv) That the report on the County Council's treasury management activities as set out in Appendix 5 be approved

(v) That the final accounts of the Hampshire Pension Fund as set out in Appendix 6 be approved

(vi) That the final accounts of the County Council for 2002/03 be approved and submitted to the Council

(vii) That progress in implementing financial management policies as set out in Appendix 7 be noted

(viii) That £0.2m be added to the Leader's grants budget from balances

(ix) That the following recommendations on the financing of capital expenditure, as set out in Appendix 8, be approved:

a) That capital payments for the year be financed as set out in Table 2 of Appendix 8

b) That approval be given for the additional capital schemes contained in Table 2 of Annex 2 to Appendix 8 to be carried forward to 2003/04

c) That it be determined that:

(i) £9,816,592 of expenditure reimbursed by developers and outside agencies be capitalised

(ii) a transfer of £1,934,453 credit approval from Hampshire Fire and Rescue Authority be accepted in 2002/03 and returned in 2003/04

(iii) a transfer of credit approval from Portsmouth City Council be accepted in 2002/03 if the City Council establish they wish to do so and returned in 2003/04. The amount to be reported to Cabinet

(iv) £19,347,696 capital receipts be used to meet capital expenditure in 2002/03

(v) £14,964,124 (including £2,383,932 reimbursed by other authorities in respect of deemed debt) be set aside as provision for credit liabilities from the revenue account to avoid new loans authorised by credit approvals

(cdc) That services' capital programme cash limits for 2003/04 be increased by the sums shown in:

(i) column 6 of Table 1 of Annex 1 to Appendix 8 (to reflect the carry forward of capital schemes and of the balance of cash limits from 2002/03)

(ii) column 3 of Table 5 of annex 3 to Appendix 8 (to reflect services' share of capital receipts).

2. Reason

2.1 To enable the Cabinet to review the 2002/03 final accounts, prior to their submission to the County Council for approval.

3. Other options considered and rejected

3.1 Not applicable.

4. Conflicts of interest declared by the decision maker or a member or officer consulted

4.1 Not applicable.

5. Dispensation granted by the Standards Committee

5.1 Not applicable.

6. Reason for the matter being dealt with if urgent

6.1 Not applicable.

Approved by: Date:

Councillor T K Thornber

Contact: Jon Pittam, ext 7400

1. Introduction

1.1 Service cash-limited spending in 2002/03 is very close to the cash limit as predicted in the last monitoring report in April, with a net underspend of £181,000 (0.02%).

1.2 Despite the pressures during the year, Social Services spending has been contained within the cash limit, by just £72,000 (0.03%).

1.3 An overspend of £256,000 has been incurred on Environment mainly because costs of storage and disposal of fridges exceeded the additional grant received from the Government by £327,000 and savings from lower waste volumes and from other budgets were insufficient to compensate fully

1.4 As anticipated in the previous monitoring report spending on Policy and Resources was £331,000 below the cash limit (-1.0%), mainly because of lower spending on community planning grants, from the repair and maintenance of buildings winter contingency and on best value and public consultation budgets.

1.5 Net savings of £346,000 have been achieved on other budgets:

· from higher interest on balances and from savings on business rates as anticipated

· partly offset by higher spending on winter maintenance

· the Hampshire Fire and Rescue Authority's (HFRA) final levy is expected to be significantly lower than predicted

· a lower than anticipated requirement to provide corporate support for Milestones Museum and for Dibden Bay inquiry costs

· because of provision for a large public liability claim as anticipated, it has been necessary to increase the insurance provision by £1,390,000. The Chief Executive will be reporting further on insurance claims and overall risk management to a future meeting of Cabinet.

1.6 If Education, Policy and Resources, Recreation and Heritage and Social Services retain 50% of their underspendings, in accordance with the County Council's financial management policy, the effect will be to add £308,000 to balances at 31 March 2003. Final decisions on the carry forward of under and overspendings can be made by Cabinet when Executive members have considered their service final accounts reports.

1.7 Earmarked reserves at 31 March 2003 have fallen by £10.8m compared with those at 31 March 2002, mainly as a result of the planned use of capital reserves in 2002/03. School reserves are also slightly lower than at 31 March 2002.

1.8 Figures may still be subject to some further changes before the statement of accounts is approved, in particular if there are any significant changes in credit approvals. The accounts of the Pension Fund will be reported to the County Council in July and the full statement of accounts in September.

2. Service cash limit

2.1 There is a small net underspending of £181,000 (0.02%) in 2002/03 as anticipated in April's monitoring report. Variations in service spending against the cash limits reported in February, April and now are as follows:

Table 1 - 2002/03 estimated outturn

Note: In February 2003, it was agreed to carry forward Education's planned underspending into the 2003/04 and 2004/05 budgets and subject to the final outturn to set the projected overspendings on Environment and Recreation and Heritage services against the addition to balances in the 2002/03 budget.

· Social Services had identified spending pressures during the course of the year, and the Cabinet agreed in December to establish a reserve of £2m to assist in reducing delayed hospital discharges.

2.2 Variations compared with the 2001/02 outturn and from revised cash limits (as set out in Appendix 1) are as follows:

Table 2 - 2002/03 outturn - variations

2.3 Overall this is another extremely close result, following that in 2001/02. Comparative figures for previous years are:

Table 3 - Trends in service spending

Policy on carry forward of under and overspendings.

2.4 As the County Council has small balances, services are expected to carry forward overspendings to the following financial year. However when the 2002/03 budget was set, one of the specific uncertainties underlying the decision to budget for an increase in balances concerned the funding for the storage and disposal of refrigerators. New regulations had been introduced on 1 January 2002, but the Government made no decision about the allocation of additional resources to local authorities until the end of 2002. When the Cabinet considered the revised budget in February, it was anticipated that the additional grant of £843,000 allocated to the County Council for the disposal of refrigerators would be inadequate to cover the additional costs incurred in 2002/03 by about £400,000. However it was also assumed that the additional cost might be containable within the waste management contingency as a result of lower growth in waste volumes. The additional costs have amounted to £327,000, but these have only been partially offset by lower increases in other aspects of the waste management contract or from savings on other Environment budgets, resulting in an overall overspending of £256,000. In the circumstances, the Cabinet may wish to allow this overspending to be written off rather than carried forward within the Environment service.

2.5 The County Council's policy allows for the carry forward of 100% of planned underspendings identified specifically at the time of, or prior, to service budgets for the following year being prepared in January. Education has carried forward £1,284,000 for use in supporting the non-schools element of the Education budget in 2003/04 and 2004/05.

2.6 The policy on the remaining (unplanned) underspendings is to return 50% to the service and consider the use of the balance for corporate purposes. Retention of 50% of service underspendings (£218,000) would meet the majority of the cost of writing off the Environment overspending relating to the disposal of refrigerators. Social Services' underspending arises after the allocation of substantial additional funding of £2m for delayed hospital discharges during the course of the year.

2.7 However as most Executive members have yet to consider their service outturn reports and as the sums involved do not necessitate an urgent decision it would be possible to defer a decision on whether to depart from the policy of only allowing 50% carry forward of unplanned underspendings until after these reports have been considered.

Education (-£16,000)

2.8 A small underspending of £16,000 confirms the previous budget monitoring forecasts indicating that expenditure was likely to be very close to the cash limit.

Environment (£256,000)

2.9 The overspending of £327,000 on the disposal of refrigerators referred to in paragraph 2.4 and an overspending of £80,000 in highway maintenance were partly offset by a saving of £104,000 on highways management and support services together with other savings of £47,000.

Policy and Resources (-£331,000)

2.10 As anticipated, there are savings on community planning grants (£117,000) due to slower progress being made in developing district community strategies than had originally been envisaged. The full amount of the winter contingency within the repair and maintenance of buildings budget was also not taken up, resulting in an underspending of £79,000. These and other factors resulted in an underspending of £331,000 against Policy and Resources budget, marginally higher than the £240,000 forecast in the April monitoring report.

Recreation and Heritage (-18,000)

2.11 When the revised budget was approved allowance was made against the budgeted increase in balances to write-off the Milestones Museum deficit of £324,000 in 2001/02 and a projected deficit of £156,000 in 2002/03, subject to an anticipated 50% contribution from Basingstoke and Deane Borough Council. The outturn position is more favourable than forecast with the projected deficit in 2002/03 being limited to £135,000. Basingstoke and Deane Borough Council are expected to make an immediate contribution towards £50% of the cumulative deficit (£115,000) and thus the requirement for corporate support for Milestones Museum is £136,000 lower than allowed for in the revised budget. Savings of £18,000 have been achieved on other budgets.

Social Services (-£72,000)

2.12 Management action to deal with spending pressures have succeeded in achieving a Social Services outturn just within the cash limit. This is on the basis of an allocation of £1,050,000 from the delayed hospital discharges reserve to pay for specific care packages for clients vacating acute hospital beds. This leaves the balance of £950,000 to support continuing action in 2003/04. Its use is intended to maintain improved performance in avoiding delayed discharges before the introduction of fines payable to the NHS from 1 January 2004.

Cash limit adjustments

2.13 Appendix 1 shows the adjustments made to cash limits since the original budget for 2002/03 and Appendix 2 shows the variations from those approved cash limits for each service. The Education cash limit for 2002/03 has been increased by £304,000 as a result of a problem in apportioning supply teacher national insurance costs between different schools when the new SAP payroll was introduced. The problem was only completely resolved after the end of the year and will require some of the apportionments to be made to individual schools in 2003/04. A compensating cash limit adjustment will occur in 2003/04 providing all costs can be apportioned to specific schools.

3. Other budgets

3.1 The overall underspend on other budgets is just over £0.3m compared with the sum previously projected of £0.8m. A full analysis of the variations on other budgets is contained in Appendix 3.

Hampshire Fire and Rescue Authority (HFRA) levy (-£671,000)

3.2 The HFRA is yet to report on spending in 2002/03 but according to the HFRA Treasurer the outturn is expected to be £842,000 lower than the original budget, which would, in accordance with established practice, translate into a reduction of £671,000 in the levy on the County Council. £292,000 of the HFRA saving is the result of lower pension costs which are unpredictable due to the impact on lump sum payments of the decisions of individual officers on when to retire. For this reason pension payments have been ring-fenced within the HFRA levy. Savings are also anticipated in retained firefighters and non-uniformed pay costs and in other operational budgets, including additional income.

3.3 When the HFRA set its budget for 2003/04 it gave notice that 2003/04 levies might be increased to reflect any underspend achieved by the Authority in 2002/03. The Fire Authority's decision on by how much to increase the levy will not be taken until this is considered by the Finance and General Purposes Committee on 10 July. However, it can be expected, for example, that an increase will be needed to meet the eventual cost of implementing the firefighters' pay awards for November 2002 and 2003, so far as any costs above budgeted assumptions are not covered by transitional funding or savings realisable in 2003/04. The 16% phased pay offer made by the employer includes an increase of 7% from November 2003. This will add over £300,000 to the budgeted pay cost increase of 4% in 2003/04. This would therefore need to be a first priority in any revision of the Fire budget in 2003/04, together with any slippage in pensions costs budgeted for 2002/03.

Capital financing charges (-£78,000) and interest on revenue balances
(-£880,000)

3.4 Base rate fell to 3.75% in February and mainly as a result of this change the average rate of interest payable on loans for capital financing purposes fell from 5.32% in the revised budget to 5.29%, resulting in a small reduction in interest costs. Extra interest on balances as a result of favourable cash flow trends amounted to £880,000, so that the overall saving in capital financing costs and interest on revenue balances is in line with the £1m forecast in April.

Winter maintenance (+£308,000)

3.5 An overspending of around £220,000 had been predicted, but the final outcome was higher at £308,000.

Insurance (+£1,390,000)

3.6 The contribution to or from the insurance provision is based upon the value of claims paid in the year and the assessed value of outstanding liabilities for the year. As a result of higher levels of fire reinstatement and one large outstanding public liability claim, an increase of £1,390,000 is required.

3.7 The insurance reserve currently stands at £5.0m but as the cost of outstanding fire reinstatement currently exceeds £6m it is not recommended that the increase in insurance provision should be funded by a transfer from the insurance reserve.

Revenue contributions to capital

3.8 As explained in Appendix 8, 2002/03 capital spending and financing after allowing for borrowing, grants and contributions, revenue contributions to capital are required at the budgeted level of £27.0m together with further revenue contributions of £20.0m funded from the capital reserve.

Summary - other budgets

3.9 These variations can be summarised as follows:

Table 4 - Summary of variations on other budgets

3.10 Assuming that, although no final decision has been made, only 50% of service underspendings are carried forward, the overall position is as follows:

Table 5 - 2002/03 outturn

3.11 It is suggested that £200,000 of this increase be added to supplement the Leader's grants budget on a one-off basis during 2003/04, leaving an increase of £108,000 in balances at 31 March 2004.

4. Balances

4.1 The addition of £108,000 to general balances has the following impact:

Table 6 - Balances

5. Earmarked reserves

5.1 Earmarked reserves have reduced to £58.0m at 31 March 2003, which is £5.0m more than assumed when the budget was reviewed but £10.8m less than the reserves at the start of the year.

5.2 Variations in earmarked reserves are summarised below:

Table 7 - Earmarked reserves

5.3 Details of movements in reserves during 2002/03 and of the protocol for each of the main classes of reserves are set out in Appendix 4.

6. Treasury management

6.1 The County Council's treasury management policy requires an annual report to the Cabinet on the exercise of the treasury management function. Details are set out in Appendix 5.

7. Pension Fund accounts

7.1 The separate accounts for the Hampshire Pension fund are also submitted for approval as Appendix 6.

8. Financial management policy

8.1 The County Council's financial management policy forms the basis of the County Council's medium-term financial strategy. Appendix 7 highlights the progress made in 2002/03 in implementing the policies.

9. Capital payments and financing

9.1 Appendix 8 sets out the details of capital financing for the year for approval.

10. Conclusions

10.1 This is a very close outcome (within 0.03% of total budget) for a difficult year. Prudent action was taken in setting the 2002/03 budget, and during the year, to deal with the risks inherent from additional pressures and liabilities. Executive members and budget holders, as well as all financial staff, deserve thanks for their efforts in balancing budgets and delivering excellent services during 2002/03.

10.2 The recommendations are contained on the summary decision sheet.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

Published works.

Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE

None

Contact: Jon Pittam, ext 7400

1. Summary

1.1 The Cabinet will recall that the final accounts are being reported a month earlier than normal as a first step towards earlier production of the statement of accounts and its approval by the County Council.

1.2 There are two material changes that need to be made to the published report. A new summary decision sheet is attached for approval.

1.3 There may be some minor final changes before the statement of accounts for 2002/03 is considered by the County Council in September, and any such changes will be fully reconciled and reported at that stage.

2. Changes required now

2.1 The Hampshire Fire and Rescue Authority (HFRA) is yet to consider its report on the 2002/03 accounts. It is understood that a decision by the HFRA to dismiss four firefighters has been overturned on appeal. The Authority will need to reinstate those firefighters and four year's back pay now becomes due in the 2002/03 accounts. The estimated cost is £187,000, reducing the County Council's share of the underspending on the Fire levy in 2002/03 by £149,000. This in turn reduces the County Council's overall underspend to £159,000.

2.2 Another technical adjustment is required between years for schools budgets. Final reconciliations show that teachers' pensions contributions were understated by £188,000 in April 2002 when the contribution rate increased from 7.4% to 8.35%. This will be accounted for in 2002/03 in the same way as the unapportioned national insurance (paragraph 2.13) as the charge must be reflected in individual school accounts. There will be the same neutral effect on balances at 31 March 2004.

2.3 These changes will have an impact on figures throughout the report and appendices. A copy of the amended pages will be made available with the minutes.

Summary of Appendices

Appendix 1

Adjustments to service cash limits 2002/03

Appendix 2a

Education

Revenue Expenditure 2002/03

Major variations in cash limited expenditure - underspending of £16,000

Appendix 2b

Environment

Revenue Expenditure 2002/03

Major variations in cash limited expenditure - overspending of £256,000

Appendix 2c

Appendix 2d

Recreation and Heritage

Revenue Expenditure 2002/03

Major variations in cash limited expenditure - underspending of £18,000

Appendix 2e

Social Services

Revenue Expenditure 2002/03

Major variations in cash limited expenditure - underspending of £72,000

Appendix 3

Expenditure outside service cash limits

3. Expenditure outside service cash limits

3.1 Table 1 below provides a detailed schedule of the variations on budgets outside service cash limits, which is summarised in Table 4 of the report.

Table 1

Details of the variations are as follows:

HFRA Levy

3.2 The HFRA levy for 2002/03 is £38.940m and though a final levy for 2002/03 has yet to be reported it is expected to be £671,000 lower than budgeted which represents a savings of £842,000 against the overall budget for the HFRA. Savings have arisen as a result of lower pension costs of £292,000, which are ring fenced, but also as a result of lower spending on retained firefighters, non-uniformed pay and other operational costs. Income is also higher than estimated.

Contingency Provision (-£176,000)

3.3 A contingency provision of £2.069m was included in the revised budget for waste management contract costs which has been fully allocated to the Environment service but allocations agreed earlier in the year for the Dibden Bay inquiry and to support Milestones Museum have not been required in full, leaving a balance of £176,000 unallocated. Table 2 summarises the position:

Table 2

Capital financing charges (-£78,000)

3.4 The savings of £78,000 against the revised budget are summarised in Table 3 below:

3.5 Base rate fell to 3.75% in February 2003, and mainly as a result, interest payable on loans for capital financing purposes was lower at 5.29% than the 5.32% assumed in the revised budget, resulting in lower interest costs of £83,000. This was the main reason for capital financing costs being lower than in the revised budget.

Interest on revenue balances (-£880,000)

3.6 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 deposit, together with the excess of creditors over debtors. These are difficult to forecast with precision, but a saving of around £1m had been anticipated in the April budget monitoring report and the final position was fairly close to this prediction.

Revenue contributions to capital (-)

3.7 The revised capital financing plan for 2002/03 required the use of revenue contributions to capital of £27.0m and a contribution of £17.5m from the capital reserve. Appendix 8 summarises the capital financing position in 2002/03 and identifies that all of the budgeted revenue contributions will be required to finance capital payments in 2002/03, together with a further £0.1m from the capital reserve.

Insurance provision (£1,390,000)

3.8 The assessed value of outstanding liability claims was £2.1m higher at 31 March 2003 than at the end of the previous year, but claims paid in the year were £0.7m lower than premiums, resulting in a £1.4m charge to the revenue account. The figures are summarised in Table 4 below:

Table 4

3.9 Though in accounting terms, there are no liabilities for which a provision is required in the accounts in respect of damage to the County Council's buildings, there are nonetheless substantial known commitments to be met in 2003/04 mainly arising from fires occurring in 2002/03, totalling over £6m. It is therefore recommended that the insurance reserve should be retained at its current level of £5.0m despite the increase in the insurance provision and the level of premiums for fire, flood and storm damage to buildings will need to be reviewed in advance of 2004/05's budget.

Business rates (-£163,000)

3.10 Business rate savings of £163,000 against the revised budget arose mainly as a result of successful appeals against school rating valuations.

Magistrates' Courts Committee (£17,000 but matched by increased Government Grant of £15,000 and an additional reserve transfer of £2,000)

3.11 The Magistrates' Courts Committee sets its revised budget for 2002/03 on the basis that it would carry forward a saving of £210,000 against its cash limit set by the Lord Chancellor's Department. The saving was in fact £19,000 lower at £191,000 an increase of £17,000 after allowing for the contributions from Southampton, Portsmouth and Isle of Wight unitary authorities. The impact upon the County Council's position in 2002/03 is neutral however after allowing for additional Government grant of £15,000 and an adjustment of £2,000 to the reserve transfer.

Highway winter maintenance (£308,000)

3.12 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. Winter maintenance expenditure in 2002/03 totalled £2,024,000, £308,000 above the revised budget. During the winter two periods of snowfall occurred during January 2003 and salting operations were carried out on approximately 60 days, which was slightly above the average number allowed for in the budget.

Mandatory awards to students (£7,000)

3.13 The County Council is responsible for paying awards to disabled students towards their special needs, which they receive in addition to student loans. The awards are 100% grant-aided, but the County Council is responsible for the cost of any unrecovered grant overpayments.

Doubtful debt provision (-£81,000)

3.14 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. Previously a specific provision had been made for doubtful Social Services debts, but as from 2002/03 these are allowed for in the general provision, adopting a consistent set of criteria. The overall provision at 31 March 2003 is £1,016,000 which is £381,000 less than the combined provision at 31 March 2002. A reduction of £300,000 had been anticipated in the revised budget, so that the saving against the revised budget amounts to £81,000.

Specific grants (-£24,000)

3.15 The additional grants comprise:

Table 5

Revenue Support Grant (£7,000)

3.16 Revenue Support Grant is usually fixed for the year at the time of the Revenue Support Grant Settlement. However where errors have been made in the distribution of grant and brought to the government's attention but not corrected in the settlement, which have a significant effect on one or more local authorities, the Government has been prepared to amend the original grant settlement. This has occurred in 2001/02 as a result of errors in Haringey, Watford and Hertfordshire's SSA, which were understated in total by £265,000. All other local authorities incur a small reduction in Revenue Support Grant, amounting to £7,000 for the County Council.

Appendix 4

Earmarked reserves at 31 March 2003

Annex 1 - Appendix 4

Notes to summary of earmarked reserves at 31 March 2003

1. Schools reserve

In aggregate schools incurred expenditure of £2,622,000 more then their delegated budgets reducing the reserve to £28,332,000 at the end of the year. The table below summarises the position over categories of school.

Schools general reserve

	Variation in the year	Balance at 31 March
	£'000	£'000	% of budget
Nursery	-1	82	10.7
Primary	-1,474	16,495	6.8
Secondary	-821	10,022	4.6
Special	-326	1,733	7.2
	-2,622	28,332	5.8

The average level of school reserves has fallen as a proportion of budget from 6.9% to 5.8% during 2002/03.

2. Capital reserve - credit approval transfer

Commitments to transfer credit approvals to other local authorities in 2003/04 or subsequent years are as follows:

3. Designated underspending

The table below summarises the movements in the reserve balance during 2002/03:

4. Invest to save

The table below summarises the movements in the reserve balance during 2002/03:

5. Annex 2 - Appendix 4

5.1 Protocol for earmarked reserves

Appendix 5

Treasury management activities 2002/03

1. Introduction

1.1 The new Treasury Management Policy Statement adopted by the County Council in February 2003 requires an annual report on the exercise of the treasury management function to be presented at the end of each year.

1.2 This report summarises the main aspects of the management of the Council's debt and lending in 2002/03 and in particular sets out:

· The Council's external borrowing requirement in 2002/03

· The economic background

· Types of borrowing used

· A comparison of the composition of Consolidated Loans Pool (CLP) debt outstanding at 31 March 2003 with that for the previous year.

2. External borrowing requirement in 2002/03

2.1 The Council's external net borrowing requirement depends on:

· The level of borrowing required

· Less the availability of internal balances.

2.2 The level of borrowing required for capital expenditure amounted to £39.3m in 2002/03 which was determined as follows:

2.3 As a result, bringing into account a decrease in internal funds of £15.8m, the level of external borrowing increased by £55.1m as the following table shows:

3. External borrowing

3.1 At its meeting in February 2002 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

3.2 The Policy and Resources Committee approved a treasury management strategy for 2002/03 in February 2002. Base rates then stood at 4%. At that time, market commentators were expecting rates to rise slowly over 2002/03 as economic recovery strengthened. Their expectations proved to be unfounded. Instead base rates were remarkable stable, staying at 4% until February 2003, when they were reduced by 0.25% to 3.75%.

3.3 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.

3.4 Long-term rates had been relatively stable over the year to February 2002. At the time of that meeting 25-year rates stood at 4.875%. Forecasters were predicting marginal increases in long-term rates in 2002/03 but no dramatic changes. In the event, after rising initially in the early part of the year to a peak of 5.375%, for much of the remainder of the year long-term rates were on a downward trend, reaching a low in the middle of March 2003 of 4.45%.

3.5 In February 2002, the Committee agreed a guideline figure for long-term borrowing in 2002/03 of £19m to maintain the balance between fixed and variable-rate debt. In practice, loans were taken from the Public Works Loan Board (PWLB) totalling £22m during the year, in line with the agreed strategy, reflecting the fact that rates fell unexpectedly. £18m worth of those loans were for periods of 17 years or more. Two loans totalling £4m were taken which will mature in five years. The new loans taken are listed below:

3.6 The average rate payable on the long-term fixed-rate portfolio fell during the year from 7.2% to 6.8%. The current PWLB rate for over 20 years is 4.5%.

Lender's option/borrower's option loans

3.7 The treasury management strategy report presented to Cabinet in February 2003 mentioned that the commercial money market had become increasingly competitive in the last year or so. In particular lender's option/borrower's option loans (LOBOs) were becoming more attractive, with rates matching or sometimes below PWLB rates.

3.8 A typical LOBO means taking a loan for a primary period at a relatively beneficial interest rate fixed for that period, followed by a higher rate for the remaining period which can be changed by the lender every six months. The Council, as borrower, would be able to opt to repay the loan at the end of the primary period and every six months thereafter, but only if the lender chooses to change the quoted rates.

3.9 As stated in February, the main advantages of LOBOs are as follows:

· Very cheap initial rates can be obtained (sometimes below 1%), which cannot be matched either by long or short-term loans available elsewhere.

· Quoted rates for the remaining periods to maturity are also relatively attractive, being similar to those available from the PWLB, although the lender can change the rate every six months - at which point the Council can repay.

3.10 There are also disadvantages, which are:

· There is a lack of certainty - the lender can change the rate every six months at the end of the primary period.

· If the rate isn't changed the Council cannot repay.

· The minimum principal sum for a LOBO is £4m, higher than the normal £2m tranches being taken from the PWLB.

3.11 LOBOs do not provide the guaranteed long-term interest rate stability provided by the PWLB's fixed-rate loans, but they are an attractive option when they offer very low interest rates for the primary period, and competitive rates thereafter. The Cabinet agreed in February that a ratio of 2:1 between new long-term fixed-rate borrowing and LOBOs would be appropriate. However, they would only be taken on two main conditions:

· That they would generate short-term savings over their primary periods compared with standard short and long-term interest rates.

· That their indicative rates for their remaining periods would be no higher than the trigger rate used for fixed-rate long-term borrowing.

3.12 Three LOBOs were taken in 2002/03 totalling £12m as follows:

Temporary borrowing

3.13 Temporary external debt includes borrowing from the Pension Fund and Hampshire Police Authority. Borrowing from these two sources reached peaks of £68.0m and £20.1m respectively. Temporary borrowing from other sources reached a peak of £32.0m at the beginning of August 2002. Interest to the Pension Fund and Police Authority was paid based on the monthly average seven-day notice rate, which over the year averaged 3.85%. The average rate paid on borrowing from other organisations was 3.84%.

4. External lending

4.1 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. In 2002/03 it included the major clearing banks, two top building societies, four highly rated European banks, and also two money market funds (MMFs), which were made available to local authorities from April 2002. MMFs 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. Funds can also be lent to other local authorities.

4.2 The weighted average rate achieved on funds lent out temporarily was 3.95%.

5. CLP debt outstanding

5.1 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.

5.2 The following table sets out the balance of total indebtedness between long and short-term external borrowing and internal resources both at 1 April 2002 and 31 March 2003:

Appendix 6

Hampshire Pension Fund - 2002/03 accounts

1. Introduction

1.1 This report presents the Pension Fund accounts for 2002/03.

2. 2002/03 accounts

2.1 A summary revenue account for 2002/03 is shown below with equivalent figures for the previous year.

2.2 Employees' contributions rose by 9.6% compared with the previous year. Pay increased generally by 3% from 1 April 2002 and 1% from 1 October 2002, equivalent to 3.5% from 1 April 2002. Contributor numbers rose during 2002/03 by 5.8%, from 40,075 to 42,403, most being part-time workers.

2.3 Employers' contributions increased by 12.3%. After excluding early retirement charges of £3.5m in 2001/02 and £2.1m in 2002/03, employers' contributions rose by 15.3% from £60.1m in 2001/02 to £69.3m in 2002/03. These are assessed as a proportion of employees' contributions which rose by 9.6%. The remaining difference is explained by the fact that employers' contribution rates rose between 2001/02 and 2002/03 from 195% of employees' contributions to 205% (an increase of 5.1%) and 210% for voluntary bodies.

2.4 Transfer values received fell by 16.1% or £2.8m. £2m of this year's figure was accrued in last year's accounts and £0.8m of the previous year's figures was an AVC bulk surrender from Equitable Life.

2.5 Pensions paid increased by 4.8%. Pensions were increased by 1.7% on 8 April 2002. The number of pensions in payment rose in 2002/03 by 3.5% from 21,775 to 22,547.

2.6 There was a 8.0% increase in lump sums and benefits paid. These include deferred benefits going into payment, retirements and death grants. These are based on final year's pay which rose in 2002/03 by an average of 3.5%. There appears to have been a disproportionately high number of long-serving, high-earners retiring and death grants were 50% higher, each costing two years' pay.

2.7 Transfer values paid rose by 6.2% or 17% after ignoring a previous year's accrual of £0.9m. This reflects an increase in numbers of ex-staff transferring to other schemes.

2.8 Costs of administration rose by 7.1%. The main factor was an increase in administrative costs associated with a 6.1% increase in the number of scheme members from 78,583 to 83,375.

2.9 Investment income fell by 7.2%. Interest rates were low in 2002/03 compared with the previous year. This led to reduced income on the Fund's bond and cash holdings. Dividends on shares also dropped, particularly on UK and European shares.

3. Net assets statement

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

3.2 The market value of investments fell during 2002/03 by 21.5%. The overall fund balance fell by 19.5%. This reflects a third year of poor performance by most equity markets. Index returns in 2002/03 in the UK, US, Japanese and European equity markets were -29.8%, -32.4%, -25.6% and -34.4% respectively. Returns on fixed-interest stocks were better. Index returns in the UK and overseas were 11.3% and 12.5% respectively. The poor performance of equity markets led to a £333m fall in the Fund's market value relative to its book cost.

3.3 Annex 1 provides a detailed analysis of fund holdings as at 31 March 2003. Annex 2 contains a series of graphs showing trends in pension activities since 1977.

Recommendation

That the accounts for 2002/03 be approved.

Annex 1 of Appendix 6

Pension Fund investments

Summary of holdings on 31 March 2003

Appendix 6 Annex 2

RECENT TRENDS IN PENSION FUND ACTIVITIES

1. Number of Contributors

For the past eight years all part-time recruits have joined the LGPS automatically, whereas previously they only joined if they opted in.

2. Number of Pensioners

This graph continues to show a remarkably consistent increase in the number of pensioners in the fund.

3. Annual Income

These diagrams illustrate the growth of the Fund's income since 1977, together with the split over the four main elements. Income has generally grown steeply in recent years, although it dropped slightly in 2000/01. However it has started to increase again since then as a result of increased employers' contribution rates.

Realised and Unrealised Profits

This diagram shows the realised profit and, from 1986/87 when figures are available, unrealised changes in market value. The effect of the stock market falls in recent years are clearly shown.

5. Growth of the Pension Fund

Markets have suffered a setback for the third consecutive year after a particularly strong performance over the previous five years, as the diagram below shows. This has resulted in market value being lower than book cost at March 2003.

6. Spread of Investment by Market Value

The distribution of the Fund is illustrated in this diagram. The constantly changing picture is partly due to the relative values in different sectors of the market. Nevertheless, major changes are continually being made by positive portfolio management. In this connection it should be borne in mind that a switch of only 1% amounts to £15.0m

Appendix 7

Overall purpose : seek to ensure a high standard in the management of public finances in the best interests of the people of Hampshire.

Key policies designed to achieve this are to maintain and seek continuous improvement in:

Appendix 8

2002/03 Capital Spending and Financing

1. Capital Expenditure

1.1 Table 1 below summarises the extent to which the 2002/03 capital programme has been started and the carry forward implications for 2003/04

Table 1 - 2002/03 Capital Programme

1.2 Annex 1 provides an analysis of the programme over services and contains details of requests to carry forward further schemes and an analysis of the net balance of the cash limit. Any services balance remaining at 31 March 2003 is available to offset the cost of inflation arising because of the delayed start to the schemes.

1.3 Total capital payments for the 2002/03 starts programme and from schemes in earlier years for £156.0m. This was £3.4m more than the adjusted revised budget. £2.7m of the higher spending was on schemes funded by outside agencies including £0.5m fees on the nursing homes' programme which have not yet been reimbursed by the Department of Health. £1m was on schemes which will be reimbursed by schools and £1.1m was on schemes supported by Government approvals. Payments on locally funded schemes were £1.4m less.

2. Capital Financing 2002/03

2.1 The proposed method of financing these payments is set out below:

Table 2

2.2 Capital receipts during the year amounted to £20m, or £19.3m after adjusting for the timing of deposits. This was £2.6m less than was estimated due to the timing of some receipts as between 2002/03 and 2003/04. Capital receipts in 2003/04 should therefore be correspondingly higher. All of the receipts can be used to finance new capital expenditure.

2.3 Government grants of £28.0m were principally for education (£23.7m) mostly for school conditions funding and devolved formula capital allocation. Government Grants for Magistrates Courts were (£2,9m). Contributions of £9.8m included developer contributions (£2.8m) contributions from other local authorities (£0.8m) and other contributions (£6.2m) including lottery funding.

3. Borrowing

3.1 Maximum borrowing is determined by the total credit approvals from the Government adjusted by transfers to and from other authorities. In 2002/03 credit approvals of £0.7m lent by the Hampshire Fire and Rescue Authority (HFRA) and £1.5m lent by Portsmouth City Council in 2001/02 were returned to those authorities. HFRA have lent £1.9m to the County Council in 2002/03 for return in 2003/04. These transfers amount to a net transfer from the Authority of £0.3m compared with £0.8m when the programme was last reviewed. Portsmouth City Council will shortly establish if they have unused credit approvals to lend to the County Council and if they do have credit approval to transfer revenue contributions will be reduced and an equivalent amount paid into capital reserves. In addition £120,000 credit approval was transferred to Havant Borough Council for social housing schemes included in the Social Services capital programme.

3.2 Government departments have until 30 September 2003 to issue some of their approvals for 2002/03 and so it is possible that the approvals still to be received will differ from the estimates in this report. Where there are differences, borrowings will be adjusted and offset by changes to revenue contributions.

3.3 After normal dept repayment of £12.6m the net increase in borrowings for the year was £39.3m. Other debt repayments reimbursed by other authorities for transferred services amounted to £3.0m. The County Council's debt outstanding on 31 March 2003 was £343.1m. This is equivalent to £277 per head of population. The increase in debt of £39.3m represents an increase of 12.9% over the year.

3.4 After allowing for borrowing, grants and contributions, capital receipts and the budgeted provision for revenue contributions the balance of the payments (£18.5m) is funded from capital reserves. This is £1.1m more than was estimated when the programme was last reviewed.

3.5 The trend in outstanding debt and projections for the next three years is set out in the following graph:

Table 3 - Trends in outstanding debt - at 31 March 2003

Capital receipts

3.6 Annex 3 contains an analysis of capital receipts obtained in 2002/03. Services can retain 25% of capital receipts from the sale of their assets with up to 100% for approved in/out schemes. Receipts from development account or county farm sales are retained for corporate use. In accordance with this policy, services' share of the 2002/03 capital receipts now due to be allocated amounts to £0.8m as set out in Table 5 of Annex 3.

4. Determinations by Cabinet

4.1 Part IV of the Local Government and Housing Act 1989 requires the County Council to make determinations for each year on certain capital issues. These are set out in recommendations:

a) That capital payments for the year be financed as set out in Table 2 of Appendix 8

b) That approval be given for the additional capital schemes contained in Table 2 of Annex 2 to Appendix 8

c) That it be determined that:

i) £9,816,592 of expenditure reimbursed by developers and outside agencies be capitalised

ii) a transfer of £1,934,453 credit approval from Hampshire Fire and Rescue Authority be accepted in 2002/03 and returned in 2003/04

iii) a transfer of credit approval from Portsmouth City Council be accepted in 2002/03 if the City Council establish they wish to do so and returned in 2003/04. The amount to be reported to Cabinet

iv) £19,347,696 capital receipts be used to meet capital expenditure in 2002/03

v) £14,964,124 (including £2,383,932 reimbursed by other authorities in respect of deemed debt) be set aside as provision for credit liabilities from the revenue account to avoid new loans authorised by credit approvals

d) That services' capital programme cash limits for 2003/04 be increased by the sums shown in:

i) column 3 of Table 5 in Annex 3 (to reflect services' share of capital receipts)

ii) column 6 of Table 1 of Annex 1 to Appendix 8 (to reflect the carry forward of capital schemes and of the balance of cash limits from 2002/03

Annex 1 - Appendix 8

Analysis of capital programmes 2002/03 and requests by services to carry forward further schemes to 2003/04

Table 1 - Analysis of Capital Programmes 2002/03

Table 2 - Requests to carry forward further schemes to 2003/04

Annex 2

Summary of capital payments 2002/03

Table 3 - Analysis of payments over services

Table 4 - Analysis of payments over type of expenditure

5. Annex 3

5.1 Analysis of capital receipts 2002/03

5.2 Table 5