Explanatory Foreword

1. Introduction

1.1. This document contains Hampshire County Council's statement of accounts for the year ended 31 March 2004. The pattern of presentation of the statement is laid down by a code of practice, which the County Council is legally required to follow.

1.2. This foreword gives:

· a summary of the various statements that make up the County Council's 2003/04 accounts

· a broad picture of where the money comes from and what it is spent on

· a summary of revenue expenditure on services and capital expenditure on new assets over the course of the year.

2. Summary of statement of accounts

2.1. The accounts for 2003/04 are set out on pages 9 to 66. They consist of:

· Statement of accounting policies

· Statement on the system of internal control and internal financial control

· Statement of responsibilities for the statement of accounts

· Consolidated Revenue Account - this covers income and expenditure on all services

· Consolidated Balance Sheet - this sets out the financial position at 31 March 2004

· Statement of total movements in reserves - this sets out how reserves have changed and been used during the year

· Cash flow statement - this summarises all cash coming in or going out for revenue and capital purposes

· Pension Fund accounts- these are the accounts of the pension fund, which is operated for employees of the County Council, Hampshire unitary and district councils and other bodies.

3. Where the money comes from

3.1. Most of the County Council's income comes from general Government grant, a share of national business rates and the council tax. In addition, specific Government grants pay directly for certain services and fees are charged to customers for some services. Interest is also earned on day-to-day balances.

3.2. The proportion of the Council's income obtained from these sources is as follows:

The share of income obtained from the Council tax increased in 2003/04 as a result of changes in the General Government grant distribution formula and a reduction in income within the national business rate pool.

4. What the money is spent on

4.1. Type of expenditure

The change in relative spending levels on Education and Social Services is mainly the result of the transfer of responsibility to Social Services from Central Government for the provision of housing- related support services to vulnerable people through the Supporting People programme.

5. Employees

5.1. In 2003/04 the County Council employed 37,052 people, making the Council one of the largest employers in the county. Many of these employees work part-time, and in full-time equivalent (fte) terms, total employees amounted to 24,633 at 31 March 2004.

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6. Summary of the year - Revenue account

6.1. 2003/04 has again been a challenging year for the management of the County Council's finances, following the introduction of changes in the formula for distributing General Government grant ( Revenue Support grant) which adversely affected Hampshire and most other county councils in the South-East. Services have continued to experience increased demand while striving to achieve the improvements in outcomes required to meet the targets in the County Council's local public service agreement with the Government, and having to deal with difficulties in staff recruitment and retention. Nonetheless overall spending has again been very closely controlled, particularly in containing spending on Social Services within the budget and limiting the impact of higher Education spending mainly related to special educational needs. In addition to maintaining an excellent rating from the Audit Commission in the Comprehensive Performance Assessment, the County Council's performance against a comprehensive selection of national performance indicators has again improved with 64% of the indicators either improving or remaining stable.

6.2. The main components of the 2003/04 budget, revised budget and actual income and expenditure are set out below:

6.3. The budget requirement for 2003/04 was set at £1,032.1m an increase of 8.2% on the adjusted budget for 2002/03. The budget was dominated by the effects of the new grant distribution formula, which resulted in the County Council receiving transitional grant of £27m but still receiving the lowest increase in government support of all county councils at 3.8%. As a result an increase of 15% in Council tax was required to support the budget. The budget continued the policy of passing on the increases reflected in the County Council's formula spending share for Schools and Social Services to those services, representing an increase of £17.9m above the cost of inflation. Additional provision of £18.4m was also made for inescapable demand and legislative pressures, including sums of £3.5m to sustain the condition of non-principal road and footway maintenance , to improve access to domiciliary care services and to provide increased capacity for residential care of the elderly. Efficiency improvements and other savings of £6.8m were built into the budget.

6.4. In July 2003 the final accounts for 2002/03 were reported. Net operating expenditure was £1.9m below the revised budget. 50% of the savings in service cash-limited budgets and trading unit surpluses were transferred to earmarked reserves, totalling £1.7m, so that the revenue account balance was £0.2m higher than forecast at 31 March 2003 at £7.8m. Extra spending on grants to voluntary organizations was approved in 2003/04 to match the increase in the revenue account balance arising from the closure of the 2002/03 accounts.

6.5. When services revised their budgets in the autumn, a saving of £0.4m was forecast on Environment, which was earmarked to be carried forward to 2004/05. Education's revised budget was £1.0m above the cash limit, mainly as a result of spending pressures related to children with special educational needs or excluded from school. Savings of £2.5m on non cash-limited budgets were also forecast mainly as a result of lower interest rates, higher interest on balances and savings in business rates due to successful valuation appeals, partly offset by an increased Fire and Rescue Authority levy following the settlement of the fire fighters pay dispute. The effect of these changes was to increase the forecast revenue account balance at 31 March 2004 to £9.3m.

6.6. At the end of the year, net operating expenditure was £6.5m below the revised budget. 50% of the savings in service cash-limited budgets and additional trading unit surpluses were transferred to earmarked reserves, totalling £1.6m. A contribution of £1.1m was also made to the insurance reserve, partly funded by a saving on the insurance provision but also from business rate savings in schools. An increase in the insurance reserve was required to cover the adverse trend in fire damage to schools resulting in an increased level of outstanding fire reinstatement work to be financed in subsequent years. The requirement for revenue contributions to finance capital payments in 2003/04 was also £7.3m lower than forecast due to slippage, avoiding the need for a planned capital reserve contribution of £3.3m and enabling £4m to be added to the reserve to enable the payments to be funded in 2004/05 or later years. Including the effect of the adjustments to the timing of revenue contributions, an overall saving of £13.8m was achieved largely matched by reserve contributions totalling £10m. The resulting saving of £3.8m led to the revenue account balance increasing to £13.1m at 31 March 2004.

6.7. The table below analyses the main factors:

6.8. In view of the uncertain prospects for government support in 2005/06 and 2006/07, the underspending on the 2003/04 final accounts was retained in balances for use in 2005/06 and later years, rather than being used to finance additional spending in 2004/05.

7. Summary of the year - capital expenditure

7.1. In 2003/04 the County Council spent £153.0m on capital projects, £6.4m less than the revised budget. Adjusted for the difference between opening and closing creditors, capital expenditure amounted to £155.7m.

7.2. Payments on schemes financed from Government grants, specific borrowing approvals and contributions from developers and outside agencies were £0.9m higher than forecast. Payments on locally resourced projects were therefore £7.3m lower than estimated. Capital receipts were £1.0m higher than expected but £1.0m less was financed from revenue reserves, so that the requirement to use revenue contributions to capital to fund capital payments in 2003/04 was £7.3m lower than anticipated, enabling a contribution of £4m to be made to the capital reserve rather than a withdrawal of £3.3m.

7.3. The amount supported by Government borrowing approvals was £53.2m. Repayment of debt amounted to £14.3m. Potential outstanding borrowing for capital purposes to be serviced by the County Council now amounts to £394.5m together with extra debt of £54.2m in respect of services transferred to the unitary and other authorities. The Council is able to borrow on a day-to-day basis from internal resources, such as the revenue account and earmarked reserve balances. Consequently, £315.3m (an increase of £43.9m on the previous year) was owed to external lenders at 31 March 2004.

8. Changes

8.1. In accordance with the transitional arrangements for the implementation of the new accounting standard on Retirement Benefits (FRS 17), the Consolidated Revenue Account and Consolidated Balance Sheet for 2003/04 incorporate for the first time the accounting entries required to comply with FRS 17. In 2002/03 the information was disclosed in notes to the accounts but not incorporated in the statements. In outline, FRS 17 requires an actuarial assessment of the County Council's share of the assets in the Pension Fund and its share of pension liabilities to be incorporated in the balance sheet together with the assessed liabilities associated with unfunded benefits payable to members of both the Teachers' and Hampshire pension schemes. In the revenue account, the net cost of services is adjusted to reflect the actuarial assessment of the employer's additional pension obligations arising from service in the year, as compared with the contributions made to the pension fund. Operating costs are also adjusted for the difference between the increase in the present value of pension liabilities and the expected return on pension assets. A transfer is then made to a pension reserve so that the effect of these charges on current council taxpayers is neutral. The assessed net liability associated with the Hampshire pension scheme and all unfunded benefits at 1 April 2003 was £452.7m but had reduced to £405.3m at 31 March 2004, mainly as a result of improved investment performance in 2003/04. This liability is both long term and volatile. Employer contribution rates, which are subject to an annual phased increase as a result of the March 2001 actuarial valuation, will be reviewed following the March 2004 valuation, with the aim of restoring full funding over the longer term.

8.2. The Hampshire Fire and Rescue Authority (HFRA) ceases to levy on the County Council and unitary cities from 1 April 2004, as in future it will receive a share of the national business rate and Government grant direct and set its own council tax precept. The County Council transferred £490,000 of its revenue account balance to the HFRA on 1 April 2004 in accordance with a formula agreed between the three former contributory authorities and HFRA.

9. Further information

9.1. You can obtain further information about the accounts, and the related companies, from The County Treasurer, Hampshire County Council, The Castle, Winchester, SO23 8UB, telephone (01962) 847533, e-mail [email protected].