Explanatory Foreword

1. Introduction

1.1. This document contains Hampshire County Council's statement of accounts for the year ended 31 March 2007. 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 2006/07 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 2006/07 are set out on pages 9 to 70. They consist of:

· Statement of accounting policies

· Statement on the system of internal control

· Statement of responsibilities for the statement of accounts

· Income and Expenditure account - this covers income and expenditure on all services recorded in accordance with UK generally accepted accounting practice

· Statement of movement on the General fund balance - identifies the adjustments required to the income and expenditure account in arriving at the General Fund balance for council tax setting purposes

· Statement of total recognized gains and losses - brings together all the gains and losses in the year that are reflected in the change in Net worth

· Balance Sheet - this sets out assets and liabilities at 31 March 2007

· 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. Following the introduction of the new schools funding arrangements in 2006/07, most of the County Council's income comes from Specific Government grant and the Council tax. The national business rate and general government grant now contribute only 8% of the Council's income, less than contributed by charges made to customers for some services. Interest is earned on day-to-day balances.

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

	2005/06 %	2006/07 %
Council tax	29	29
National business rates	26	7
General Government grant	21	1
Fees, charges and interest	13	13
Specific Government grants	11	50
	100	100

There was no significant change in the balance of income obtained from local and national taxes and from fees and charges in 2006/07. However the change in school funding arrangements has meant that most of the income from national taxes previously received in the form of National Business rates and General Government grant is now received as Dedicated Schools Grant, a specific ring-fenced grant. Specific grants now account for 50% of the Council's income.

4. What the money is spent on

4.1. Type of expenditure

	2005/06 %	2006/07 %
Staff costs	55	56
Running expenses	40	40
Capital financing	5	4
	100	100

4.2 Service shares of gross revenue expenditure

	2005/06 %	2006/07 %
Education	58	58
Social Services	27	28
Highways, roads and transport	6	5
Cultural, environmental and planning services	8	8
Other services	1	1
	100	100

5. Employees

5.1. In 2006/07 the County Council employed 39,136 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, the total number of employees was 26,533 at 31 March 2007.

6. Summary of the year - Revenue account

6.1. 2006/07 has been a particularly difficult year in the challenges posed for the management of the County Council's finances, especially in dealing with the impact of increased social care demand pressures, which resulted in actual spending on adult social care in 2005/06 being £11.1m higher than budgeted, with a substantially higher full year impact in 2006/07 from additional care packages. The Government also introduced new formulae for the distribution of formula grant in 2006/07 and a different form of presentation known as the four block model. The new formulae were particularly disadvantageous to Hampshire and most other county councils in the South East and but for the impact of the transitional damping arrangements the County Council would have received £37m less than its actual grant allocation. The actual allocation adjusted for the discontinuation of previous specific grants represented an effective increase of just 0.2% over 2005/06 adjusted grant. Despite the pressures on the budget, the County Council has continued to improve the quality of its services and improvements have been made in more than half of the Best Value performance indicators. Efficiency improvements assessed at £17.4m (2.9%) have been identified in 2006/07 with cumulative improvements being well in excess of the 2.5% per annum target set in the Gershon review.

6.2. The County Council also maintained an excellent rating from the Audit Commission in the Comprehensive Performance Assessment for the fifth year running, despite the `harder test' introduced in the 2005 assessment.

6.3. The main components of the 2006/07 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	554.6	568.9	559.5	-9.4
(Surpluses)/ deficits on trading units	0.4	-1.3	-2.0	-0.7
Net interest payable	19.5	16.5	13.8	-2.7
Pension interest cost and expected return on pensions assets	22.0	14.1	14.1
Net operating expenditure	596.5	598.2	585.4	-12.8
Amount to be met from government grant and local taxpayers
Council tax precept income	-448.0	-448.0	-448.0
General government grant	-19.5	-19.5	-19.5
National business rates	-100.9	-100.9	-100.9
Budget requirement	-568.4	-568.4	-568.4
Deficit for the year on the income and expenditure account	28.1	29.8	17.0	-12.8
Contribution to capital	28.5	23.1	21.7	-1.4
Excess of depreciation charge over statutory provision for debt repayment	-39.5	-45.1	-45.1
Contribution from pensions reserve	-20.9	-22.9	-22.9
Contribution to/(from) earmarked reserves	2.2	8.9	16.7	7.8
Movement in General Fund balance	-1.6	-6.2	-12.6	-6.4
General Fund balance
Brought forward 1 April 2006	-9.8	-4.1	-4.1
Carried forward 31 March 2007	-11.4	-10.3	-16.7	-6.4

6.4. The budget requirement for 2006/07 was set at £568.4m, an increase of 5.2% on the adjusted budget for 2005/06. The budget was influenced by the emerging pressures on the adult social care budget in 2005/06 and the impact of the below average increase in the level of Government support as a result of the formula grant changes. The budget continued the policy of passing on the increases reflected in the Government's spending plans for social care to Adult Services and Children's Services respectively, an increase of £3.4m above the cost of inflation. Cashable efficiency savings of £10.6m were identified for retention within the relevant services as a means of meeting demand and legislative pressures not accommodated within the budget guidelines for services. The previous strategy for the use of the grant equalisation reserve to deal with the impact of grant loss from the previous formula review was revised in order to retain the reserve to assist in phasing in the loss of grant in 2008/09 and later years. The budget was based on an estimated General Fund balance of £11.4m at 31 March 2007, £2.7m more than the equivalent 2005/06 balance, in view of the assessment of risk in the 2006/07 budget.

6.5. In June 2006 the final accounts for 2005/06 were reported. Despite higher spending of £11.1m on Adult Services, net operating expenditure was £1.5m below the revised budget. However savings and additional income of £7.2m were transferred to earmarked reserves, resulting in a reduction of £5.7m in the General Fund balance to £4.1m at 31 March 2006. Allowing for the planned use of the General Fund balance in the 2006/07 budget to finance non-recurring spending and the carry forward of small overspendings on services other than adult social care, the general fund balance at 31 March 2007 was forecast at £3.5m, £3.5m below the minimum targeted level. In view of the continuing implications of higher spending on Adult Services into 2006/07, it was decided not to require Adult Services to carry forward its 2005/06 overspending into 2006/07 and to develop a two year recovery plan to bring spending back into line with the budget. In view of the reduced level of the General Fund balance and the likelihood of adult social care spending significantly exceeding the budget in 2006/07, decisions were taken in July 2006 to increase the General Fund balance by £14.5m. This was achieved mainly by transferring £8m from various earmarked reserves and reducing revenue contributions to capital by £5m in order to supplement the budgeted contribution of £2.4m to the General Fund balance in 2006/07, in order to cover higher spending of up to £13.4m on Adult Services, while retaining a general fund balance of £7m.

6.6. When services revised their budgets in the autumn, a revised budget was set for Adult Services £10.9m above the cash limit, £2.5m lower than had been planned for. Savings of £2.5m were also achieved from higher interest on balances and capital financing costs of £2.5m and the Department for Transport also reimbursed 75% of the abortive costs incurred in promoting South Hampshire Rapid Transit (£3.3m). This enabled the planned reduction in revenue contributions to capital agreed in July to be deferred to 2008/09, while increasing the planned General Fund balance by £3.3m to £10.3m at 31 March 2007.

6.7. At the end of the year, spending on Adult Services was £7.5m higher than originally budgeted, but £3.4m lower than assumed in the revised budget, representing a successful first stage in the recovery plan. Overall net operating expenditure was £12.8m lower than the revised budget and in addition the requirement for revenue contributions to capital to finance actual capital expenditure in 2006/07 was £1.4m below the revised budget. £7.8m of these savings were transferred to earmarked reserves, resulting in an underspending of £6.4m against the General Fund compared with the revised budget, equivalent to £4.5m higher than originally budgeted. The General Fund therefore increased to £16.7m at 31 March 2007.

6.8. 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	-3.8	2.3	-1.5
Trading unit surpluses	-0.7	0.7	-
Interest savings	-2.7		-2.7
Insurance provision	-2.0	2.0	-
Part time pensions provision	-0.9	0.9	-
Specific grants	-0.9		-0.9
Revenue contributions to capital	-1.4	1.4	-
Other variations	-1.8	0.5	-1.3
	-14.2	7.8	-6.4

6.9. After allowing for £1.8m of the underspending in 2006/07 to be utilised for additional non-recurring spending in 2007/08, the General Fund balance at 31 March 2008 is forecast at £19.6m, £5.2m higher than the target level based on the risk assessment for 2007/08, subject to review in developing the budget strategy for 2008/09 to 2010/11 in the autumn of 2007.

7. Summary of the year - capital expenditure

7.1. In 2006/07 the County Council spent £173.2m on capital projects, £18.9m less than the revised budget.

7.2. Spending on schemes financed from Government grants, supported borrowing, contributions from developers and outside agencies and other scheme-specific funding was £8.0m lower than forecast. So expenditure on locally resourced projects were £10.9m lower than estimated.

7.3. Capital receipts available to finance capital expenditure in 2006/07 were £2.8m lower than anticipated, thus reducing the revenue contributions to capital required in 2006/07 by £8.1m. This enabled unsupported borrowing of £1.8m taken out in 2005/06 due to a temporary shortfall in local capital resources to be repaid and further unsupported borrowing of £4.9m planned in 2006/07 to be avoided, with the balance of £1.4m being transferred to the general capital reserve.

7.4. Spending financed from supported borrowing amounted to £39.1m, supplemented by increased unsupported borrowing of £17.1m . Repayment of debt amounted to £20.2m. Potential outstanding borrowing for capital purposes to be serviced by the County Council now amounts to £529.5m, together with extra debt of £44.7m for 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. Net of temporary investments, £321.8m (an increase of £13.6m on the previous year) was owed to external lenders at 31 March 2007.

8. Pension Fund liability

8.1 The County Council's pension liability has increased marginally from £588.8m at 31 March 2006 to £609.0m at 31 March 2007. The increase in deficit is mainly the result of the interest cost associated with the scheme deficit and of the gap between employer contributions and current service cost not having narrowed as much as anticipated, partly because of the Government's decision to defer the removal of the rule of 85 for existing scheme members not affected by the transitional arrangements, from October 2006 to April 2008. The deficit on the Pension Reserve reduces the County Council's net worth from £2.6bn to £2.0bn.

9. Changes

9.1 There are no significant changes to the County Council's range of functions in 2006/07. The presentation of the statement of accounts is however affected by two changes that have occurred in 2006/07, firstly to the school funding arrangements and secondly as a result of a change of accounting policy required by the 2006 Accounting Code of Practice to remove charges for notional interest from the net cost of services.

9.2 From 1 April 2007, spending on services within the Schools block of the Education Service is determined by the Government, subject to the local authority having the power to top up the funding level from council tax, with Government support being entirely in the form of specific grant. This is primarily through the Dedicated Schools Grant, which has taken the place of the majority of the general funding from national taxes provided through revenue support grant and national business rates. The Dedicated Schools Grant is treated as a specific source of funding for schools. This accounts for a reduction of £610m in the net cost of services in 2006/07 compared with 2005/06 with a commensurate reduction in general grant.

9.3 The 2006 Accounting Code of Practice removes the requirement to make an interest charge for the use of assets within the net cost of services which was credited to an asset management revenue account, on the basis that this is considered to be a notional charge which is non-compliant with UK Generally Accepted Accounting Practice ( UK GAAP). Depreciation charges to services are also offset by the amortization of grants and contributions applied to the funding of capital expenditure, which were also previously credited to the asset management revenue account. The 2005/06 comparatives in the Income and Expenditure account have been adjusted for these changes, reducing the net cost of services by £113m but having a neutral impact on net operating expenditure which would previously have received the credit from the asset management revenue account, which is now no longer required.

9.4 The presentation of the Statement of Accounts has also changed in 2006/07, mainly as a result of the introduction of two separate statements in place of the former Consolidated Revenue Account and a Statement of Recognised Gains and Losses in place of the Statement of Total Movements in Reserves. These changes bring the published accounts more into line with UK Generally Accepted Accounting Practice, while continuing to recognize the importance of the General Fund balance as the basis on which council tax decisions are made. The primary statements ( excluding the Pension Fund accounts) are also now presented consecutively with a single set of notes.

10. Further information

You can get more information about the accounts from The County Treasurer, Hampshire County Council, The Castle, Winchester, SO23 8UB, telephone (01962) 847533, e-mail [email protected].