Contact: Paul Carey-Kent, Deputy Treasurer, 01962 847525

David Howells, Director of Corporate Services, 023 8064 400 ext 203

1. Summary

1.1 This report summarises the spending of the Authority for the last financial year.

1.2 Taking into account the recommendation to make a revenue contribution to capital, there is a net underspending of £655,000 against the original budget

1.3 The budget monitoring report in January indicated that spending was running at £287,000 below the original budget (with pensions then predicted to be equal to the budget) but concluded that with the many uncertainties involved at the time it was premature to conclude that savings would definitely be achieved. At the same time the Authority resolved as part of its 2003/04 budget strategy to seek to maximise underspendings in 2002/03. Constituent Authorities were notified that this policy was to be followed, with the intention of utilising any underspendings to help deal with the various issues facing the Fire Authority in 2003/04.

1.4 The note of caution in the January report has been justified by the need to fund additional capital costs of £303,000 on the Command and Control system (see a separate report also on this agenda) together with a further £33,000 for vehicles expenditure (explained in the capital section of this report). It is therefore recommended that a revenue contribution of £336,000 be made to the 2002/03 capital programme.

1.5 However, several factors have combined to enable the total underspend (after that capital contribution) to increase from the indicative £287,000 in January to £655,000. The main factors were a pensions underspend (£313,000), reductions on interest, leasing and provision for debt repayment (£163,000) and additional grant income (£100,000). These are examined further in the report.

1.6 Last year was an extraordinary year for all fire authorities. The pay dispute gave rise to considerable levels of uncertainty. Resources had to be redirected towards dealing with day-to-day impact of the strike action and contingency plans had to be put in place to try and ensure the best possible level of service could be provided in the circumstances. This meant that work on some of the Authority's corporate aims and action plans had to be postponed and in some cases (for example training-related expenditure) it led directly to significant underspendings on particular budget headings.

1.7 If 2002/03 trends continue into 2003/04, it might be anticipated that there will be substantial savings against this year's budget, too. However, rather than plan on this basis it is proposed that, as in 2002/03, efforts are made to minimise spending with a view to any underspending which can be achieved becoming potentially available to assist in ensuring that the Authority is as well-placed as possible to deal with what will be needed should precepting come into place from 1 April 2004.

1.8 If that approach is adopted, then the 2003/04 budget position can be regarded as neutral for the purpose of deciding how best to utilise the 2002/03 underspending. The following is then proposed:

· £312,000 is returned to the constituent authorities who will be consulted with a view to their returning it in 2003/04 in lieu of a supplementary levy to provide for the cost in 2003/04 of the pay award to firefighters. This allows for 7% from November 2003 - i.e. an additional 3% as provision has already been made in budgets for 4% from November 2002 and from November 2003. Such provision is on the basis that although both transitional grant and offsetting savings measures are potentially available and should be pursued as vigorously as possible, it would be prudent to make provision for these costs given the uncertainty of those sources. In so far as alternative funding does become available, this too would enhance the flexibility of the Authority in dealing with the likely introduction of the precepting regime.

· £313,000 underspendings attributable to pensions are returned to the constituent authorities in line with the established practice of ring-fencing arrangements for this specific budget. This recommendation is made in the knowledge that this will improve the capacity of the constituent authorities to contribute towards setting up the reserves which the Authority will require under precepting arrangements. It still remains the case that the Authority should not hold balances, there being no certainty that precepting will commence on 1 April 2004

· £336,000 revenue contributions to capital be made as set out in Section C

· the remaining £30,000 be returned to the constituent authorities to be returned to the Fire Authority in 2003/04 for assessment of best use during 2003/04, bearing in mind the growth bids of a one-off nature which members supported in principle but which it was not previously possible to fund. An additional pressure which will require funding is the requirement on the Authority to deal with Integrated Risk Management Planning

2. Part A - Cash limited expenditure

2.1 The major areas of variation are explained below and in more detail in Appendix 1.

Retained firefighters (-£187,000)

2.2 The number of incidents in the year was 24,336 compared with the budgeted level of 23,253. However this was considerably lower than the 26,087 in 2001/02. Furthermore, some off station training courses were cancelled due to the industrial action, resulting in fewer payments being made to the retained firefighters.

Insurance (+£303,000)

2.3 Increased legal expenses have been incurred in order to mitigate the cost of personal injury, sex discrimination and other claims against the Authority. Also the provision for potential outstanding claims has been increased in the light of the latest information.

Income (-£493,000)

2.4 Additional fees and charges of £232,000 were received, most of which was reported during the year, including Farnborough Air Show £110,000 . A total of £100,000 grant income was received including £50,000 for smoke detectors and £27,000 for the New Dimensions Project. Additional income was received at the workshops of £77,000 due to undertaking more external work than anticipated.

3. Part B - Pensions

3.1 Pensions' expenditure was £292,000 below the original budget. There were no large individual variances but there were fewer transfer values paid (-£170,000) and more received (-£119,000).

4. Part C - Capital

4.1 Capital payments during the year totalled £870,000 compared with £1,236,000 forecast in January. Full details are given on a scheme by scheme basis in Appendix 2.

Command, Control & Communications project

4.2 A separate report on this agenda provides a short post-implementation review of the project. The increase in the overall cost of the scheme arises principally from the fact that the scheme - originally estimated to take about two years to implement - actually took the supplier over ten years to deliver. In that time, information and communications technology hardware and software has changed markedly with variations to the original specification and contract becoming inevitable. That said, it should be noted that the core element of the project was implemented in June 1997 and has been working successfully.

Leasing

4.3 It was planned to lease all the 2001/02 front-line appliances and 2002/03 support vehicles during the year. By 31 March 2003 three front-line appliances and most of the support vehicles had been leased. The remaining front-line vehicles were all leased in April.

4.4 During the year it was decided to buy rather than lease the CFO's car (£22,000) to retain more flexibility due to its exceptionally high mileage. Some kitting out of vans and cars totalling £11,000 was also advised by the Authority's brokers as not suitable for leasing. Although the savings on the leasing budget will have been minimal in 2002/03 as only part year effects of leasing charges will have been incurred, a total of £33,000 extra capital resources has been required. It is therefore proposed that these costs should be met by revenue contributions to capital.

Financing of 2002/03 payments

4.5 Capital payments can be financed as follows:

4.6 The Authority received £1,231,000 basic credit approvals (BCA) for 2002/03, which enable borrowing to cover capital spending. None of this will be needed. In addition the County Council holds a balance of £703,453 BCA from previous years. The Treasurer has consulted the Treasurers of Portsmouth and Southampton City Councils. They have agreed that as neither of them can make use of the balance of BCA, it should remain with the County Council until it is required by this Authority. This helps to support the future plans for Basingstoke, Cosham and HQ.

5. Part D - Treasury Management

5.1 At its meeting in February 2002, the Authority set limits on total and temporary external debt of £10.6m and £8.1m respectively and borrowing levels remained within these limits during the year.

5.2 The following strategy was followed throughout the year:

· that long and short-term rates be closely monitored

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

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

5.3 During the year this strategy was followed and four long-term loans were taken from the Public Works Loan Board for £350,000 (5.0%), £100,000 (4.875%), £100,000 (4.75%) and £150,000 (4.625%).

5.4 Daily surpluses or deficits on the cash balance are lent to or borrowed from the County Council. Overall interest was received from the County Council on a rate based on the local authority seven-day notice rate which averaged 3.85% over the year.

6. Part E - Authority assurance statement

6.1 It is now a requirement of the Code of Practice on Local Authority Accounting with which the Authority's statement of accounts complies to include an internal control statement.

6.2 The statement sets out the framework within which financial control is managed and reviewed, including the arrangement for internal audit and report on any weaknesses and the actions undertaken to rectify these.

6.3 Appendix 3 contains the statement and concludes that the Authority has an effective framework of control. Members are asked to approve this statement.

7 Determinations by the Authority

7.1 Part IV of the Local Government Housing Act 1989 requires the Authority to make determinations for each year on certain capital issues. These are set out in the recommendations below.

7 European convention on Human Rights and the Human Rights Act 1998

8.1 The proposals within this report are compatible with the provision of the European Convention on Human Rights and the Human Rights Act 1998.

Recommendations

1 That revenue contributions totalling £336,000 be made in 2002/03 financed from the overall underspending in 2002/03

2 That the accounts for 2002/03 be approved

3 That the underspendings from pensions, (£313,000) be returned to the constituent authorities on the basis that this could eventually be made available to the Authority as part of transfer arrangements associated with it becoming a precepting authority

4 That constituent authorities be consulted, through a copy of this report, on the proposal that £342,000 be returned to the constituent authorities and then returned to this Authority by means of increasing the 2003/04 levy to provide for the expected additional cost of the November 2003 pay award (£312,000) and other pressures (£30,000). Any comments should be returned to the Treasurer by 28 August 2003 in order to report to the Authority on 17 September 2003.

5 That capital payments for the year be financed as set out in paragraph 4.5

6 That it be determined that:

i) the £703,453 of BCA lent to Hampshire County Council remain with the County Council until it is required by the Authority

ii) The £1,231,000 of BCA received in 2002/03 be transferred to Hampshire County Council until it is required by the Authority

iii) £530,649 of capital receipts be used to meet capital expenditure in 2002/03

iv) £147,361 be set aside as provision for credit liabilities from the revenue account and applied to avoid new loans outlined by credit approvals

7. That the treasury management activities set out in part D be approved

8. That the Authority assurance statement set out in appendix 3 be approved.

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

Fire Final Accounts 2002/03 - General papers

Appendix 1

Major variations in revenue expenditure

Appendix 2

Capital payments 2002/03

Appendix 3

Authority assurance statement for the year ended 31 March 2003

1. Introduction

1.1 The Accounts and Audit Regulation 2003 require the Treasurer to maintain an adequate and effective internal audit.

1.2 The Treasurer employs an externally contracted 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 Treasurer on the adequacy of the internal control as a contribution to the proper economic, efficient and effective use of resources.

1.3 From 2002/03 The Code of Practice on Local Authority Accounting in the UK makes it best practice that the Chief Internal Auditor provides an independent opinion on the adequacy and effectiveness of the system of internal financial control operating at Hampshire Fire and Rescue Service.

Responsibilities

1.4 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

1.5 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 Treasurer.

1.6 The internal audit plan has been delivered in accordance with the Code of practice for internal audit in local government in the United Kingdom, issued by CIPFA.

1.7 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

1.8 In my opinion Hampshire Fire and Rescue Service have an effective framework of control which provides reasonable assurance regarding the effective, efficient and economic achievement of Hampshire Fire and Rescue Service's objectives.

Ejner Knudsen

Chief Internal Auditor

County Treasurer's Department

Hampshire County Council

9 June 2003