Explanatory Foreword

1. Introduction

1.1. This document contains Hampshire County Council's statement of accounts for the year ended 31 March 2005. 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 2004/05 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 2004/05 are set out on pages 9 to 67. They consist of:

· Statement of accounting policies

· Statement on the system of internal 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 2005

· 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:

	2003/04 %	2004/05 %
Council tax	30	29
National business rates	25	23
General Government grant	22	24
Fees, charges and interest	12	12
Specific Government grants	11	12
	100	100

There was no significant change in the balance of income obtained from local and national taxes and from fees and charges in 2004/05, however general government grant increased to compensate for reduced income from the national business rate pool.

4. What the money is spent on

4.1. Type of expenditure

	2003/04 %	2004/05 %
Staff costs	55	57
Running expenses	40	39
Capital financing	5	4
	100	100

Service shares of gross revenue expenditure	2003/04 %	2004/05 %
Education	59	58
Social Services	26	26
Highways, roads and transport	5	6
Cultural, environmental and planning services	8	8
Other services	2	2
	100	100

5. Employees

5.1. In 2004/05 the County Council employed 37,236 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 was 25,027 at 31 March 2005.

Full-time equivalent employees	March 2004	March 2005
Education	16,476	16439
Social Services	3,634	3912
Recreation and Heritage	991	1025
Environment	768	783
Central services and internal trading units	2,764	2868
	24,633	25,027

.

6. Summary of the year - Revenue account

6.1. 2004/05 has again been a challenging year for the management of the County Council's finances, although the Government's decision in December 2003 to make additional grant available in 2004/05 enabled a lower council tax to be set than had been anticipated. Services have continued to experience increased demand while the County Council has strived to achieve the improvements in outcomes required to meet the targets in the County Council's local public service agreement with the Government and in the corporate strategy, while preparing for the far-reaching organizational effects of implementing the Children's Act. Nonetheless overall spending has again been very closely controlled, with particular emphasis being required on managing pressures within the Social Services budget.

The County Council also maintained an excellent rating from the Audit Commission in the Comprehensive Performance Assessment for the third year running.

6.2. The main components of the 2004/05 budget, revised budget and actual income and expenditure are set out below:

Budget	Original budget	Revised budget	Actual	Variation from revised
	£m	£m	£m	£m
Net cost of services	1101.1	1150.3	1143.7	-6.6
Trading unit surpluses/ (deficits)	-0.4	1.0	-0.7	-1.7
Asset management revenue account surplus	-70.5	-81.2	-84.6	-3.4
Pension interest cost and expected return on pensions assets	22.3	22.8	22.8	0
Net operating expenditure	1052.5	1092.9	1081.2	-11.7
Contribution to capital	36.4	24.2	24.2	0
Contribution from other authorities	-2.3	-2.3	-2.3	0
Contribution from capital financing account	-7.8	-14.8	-14.8	0
Deferred charges	-10.0	-19.2	-19.2	0
Contribution to/(from) pension and other reserves	-15.2	-30.3	-23.1	7.2
Amount to be met from government grant, local taxpayers and balances	1053.6	1050.5	1046.0	-4.5
Council tax precept income	-405.4	-405.4	-405.4	0
General government grant	-332.9	-334.0	-334.0	0
National business rates	-313.9	-311.6	-311.6	0
Budget requirement	-1052.2	-1051.0	-1051.0	0
Variation in revenue account balance	1.4	-0.5	-5.0	0
Revenue account balance
Brought forward 1 April 2004	8.6	12.6	12.6	0
Carried forward 31 March 2005	7.2	13.1	17.6	4.5

6.3. The budget requirement for 2004/05 was set at £1052.2m an increase of 5.9% on the adjusted budget for 2003/04. The budget was dominated by the effects of the partial removal of the 2003/04 Education damping designed to limit the impact of the new grant distribution formula on schools, which resulted in the County Council receiving the fourth lowest increase in government support amongst equivalent county councils. As a result of the additional grant announced by the Chancellor of the Exchequer after the initial grant consultation, it was possible to contain the increase in council tax in 2004/05 to 4.7%. 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 £23.9m above the cost of inflation. Additional provision of £8.7m was also made for inescapable demand and legislative pressures, including £3.8m for non-recurring spending financed from balances and from non-recurring savings. This programme included provision for establishing a team of Community Safety officers and for earmarking the County Council's share of the additional council tax income from reducing second home discounts mainly for affordable housing for key workers. Efficiency improvements of £5.0m were built into the budget.

6.4. In June 2004 the final accounts for 2003/04 were reported. Net operating expenditure together with revenue contributions to capital were £13.8m below the revised budget. 50% of the savings in service cash-limited budgets, together with savings in the insurance provision and revenue contributions to capital and additional trading unit surpluses were transferred to earmarked reserves, totalling £10.0m, so that the revenue account balance was £3.8m higher than forecast at 31 March 2004 at £13.1m. Because of the uncertain prospects for Government support in 2005/06 and 2006/07, the underspending in 2003/04 was retained in balances for use in 2005/06 and later years, resulting in estimated balances of £10.9m at 31 March 2005.

6.5. When services revised their budgets in the autumn, a saving of £0.8m was forecast on Policy and Resources, which was earmarked to be carried forward for use in 2005/06 and 2006/07. Savings of £3.4m on non cash-limited budgets were also forecast mainly as a result of lower interest rates, higher interest on balances, savings in business rates due to successful valuation appeals, and a VAT refund on library income. These savings were partly offset by the need to provide for a reduction in Government support estimated at £1.2m, anticipated as a result of the correction of population data. The effect of these changes was to increase the forecast revenue account balance at 31 March 2005 to £13.1m.

6.6. At the end of the year, net operating expenditure was £11.7m below the revised budget. 50% of the savings in service cash-limited budgets, the reduction in the insurance provision , uncommitted council tax second homes income and additional trading unit surpluses were transferred to earmarked reserves, totalling £7.2m. The resulting saving of £4.5m led to the revenue account balance rising to £17.6m at 31 March 2005.

6.7. The table below analyses the main factors:

	Over/ under- spending	Contribution to/from- reserves	Net over/ under- spending
	£m	£m	£m
Service cash-limited spending	-0.4	0.5	0.1
Business rates	-1.7	-	-1.7
Highways winter maintenance	0.8	-	0.8
Interest savings	-3.4	-	-3.4
Insurance provision	-3.8	3.8	0
Trading units	-1.7	1.7	0
Second Homes income	-1.0	1.0	0
Other variations	-0.5	0.2	-0.3
	-11.7	7.2	-4.5

6.8. Additional expenditure of £0.9m mainly for priority one-off investments was agreed in 2005/06, leaving the balance of the underspending available to assist with the outcome of the pay and benefits review and the uncertainties concerning the 2006/07 grant settlement.

7. Summary of the year - capital expenditure

7.1. In 2004/05 the County Council spent £208.4m on capital projects, £5.6m more than the revised budget.

7.2. Expenditure on schemes financed from Government grants, supported borrowing and contributions from developers and outside agencies were £1.7m higher than forecast. Payments on locally resourced projects were therefore £3.9m higher than estimated. Capital receipts available to finance capital expenditure in 2004/05 were £5.2m higher than expected but £2.8m less was financed from revenue reserves and unsupported borrowing, so that the requirement to use revenue contributions to capital to fund capital payments in 2004/05 was £1.5m higher than anticipated, requiring a contribution of £4.8m from the capital reserve.

7.3. Expenditure financed from supported borrowing amounted to £61.2m, supplemented by unsupported borrowing of £21.1m primarily for the ENHANCE project. Repayment of debt amounted to £16.2m. Potential outstanding borrowing for capital purposes to be serviced by the County Council now amounts to £460.4m together with extra debt of £51.5m 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. Thus, net of temporary investments,£271.9m (an increase of £20.1m on the previous year) was owed to external lenders at 31 March 2005.

8. Changes

8.1. The County Council implemented the new Financial Reporting standard on Retirement Benefits (FRS17) in preparing its financial statements for 2003/04. In 2003/04 the present value of pension liabilities was assessed using a rate determined by the Government Actuaries Department based on the assumed long term real rate of return on long dated index linked stocks. In 2004/05 the Accounting Code of Practice required liabilities to be discounted on the basis of the AA corporate bond rate, as prescribed by FRS 17. This had the effect of reducing the discount rate by 1.1% in 2004/05 and this revised assumption added approximately £200m to the value of pension liabilities in 2004/05. As a result the net pension liability increased by £192m from £405m to £597m, whereas based on consistent assumptions there would have been a further small reduction in the net liability in 2004/05. This liability is both long term and volatile. Employer contribution rates have been subject to an annual phased increase as a result of the March 2001 actuarial valuation and will continue to increase on a phased basis 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) ceased to levy on the County Council and unitary cities on 1 April 2004, it now receives a share of the national business rate and Government grant direct and sets 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.

8.3. The County Council ceased to contribute to the costs of the Magistrates Courts Committee when responsibility for funding of the service passed to a national agency from 1 April 2005.

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].