Archived decisions

Notes to the core financial statements

1

Prior period adjustment

In the 2006/07 Statement of Accounts, the Council has adopted three significant new

accounting policies that impact on the comparative figures for 2005/06 in the Income

and Expenditure Account:

* capital financing charges for the use of fixed assets are no longer made to service

revenue accounts, support services and trading accounts

* credits for Government grants deferred are now posted to service revenue accounts,

support services and trading accounts rather than credited to the Asset Management

Revenue Account

* gains and losses on the disposal of fixed assets are recognised in the Income and

Expenditure Account.

These changes have had the following impact on the comparative figures for 2005/06

compared with those published in the 2005/06 Statement of Accounts.

2005/06

Removal

Reallocation

Recognition

2005/06

Published

of capital

of govt

of gains and

comparatives

Consolidated

financing

grants

losses on

in Income

Revenue

charges

deferred

disposal of

and

Account

credits

fixed assets

Expenditure

Account

£'000

£'000

£'000

£'000

£'000

Central Services to the

3,742

-

-

-

3,742

public

Cultural, environmental

99,726

-7,291

-931

-

91,504

and planning services

Education Services,

734,372

-64,709

-12,716

-

656,947

Highways, roads and

85,180

-15,554

-3,764

-

65,862

transport services

Social Services

276,210

-5,607

-2,741

-

267,862

Court Services

481

-

-

-

481

Corporate and

13,016

-

-

-

13,016

democratic core

Reward grant

-3,216

-

-

-

-3,216

Non-distributed costs

2,328

-

-

-

2,328

Reduction in provisions

-2,290

-

-

-

-2,290

Net cost of services

1,209,549

-93,161

-20,152

-

1,096,236

Internal trading accounts

75

-

-

-

75

Asset Management

Revenue Account

-98,175

93,161

20,152

-

15,138

Pensions interest cost &

Expected return on assets

18,960

-

-

-

18,960

Net operating expenditure

1,130,409

-

-

1,130,409

* This relates to net interest payable.

33

2a

Disclosure of change in basis of Government support for schools

For 2006/07, the arrangements for Government support for the funding of schools

changed. Previously funds were provided as part of the Council's overall Revenue

Support Grant. In 2006/07, the Council has received a specific grant - the

Dedicated Schools Grant. £610 million has therefore been credited against the

Education service outturn as a specific grant in the Income and Expenditure Account

that would previously have been treated as general Government grant.

The difference between 2006/07 figures and comparative

figures for 2005/06 for these two lines is substantially explained by this change.

2b

Disclosure of deployment of Dedicated Schools Grant

The Council's expenditure on schools is funded by grant monies provided by the

Department for Education and Skills, the Dedicated Schools Grant (DSG).

DSG is ring-fenced and can only be applied to meet expenditure properly included

in the Schools Budget. The Schools Budget includes central expenditure covering

education provision and a restricted range of services provided on an authority-wide

basis and the individual Schools Budget, which is divided into a budget share

for each school. Over and underspends on the two elements are required to be

accounted for separately.

Details of the deployment of DSG receivable for 2006/07 are as follows:

Individual

Central

Schools

Total

Expenditure

Budget

£'000

£'000

£'000

Original grant allocation to schools Budget for the

78,059

537,744

615,803

current year

Adjustment to finalised grant allocation

-1,074

-584

-1,658

DSG receivable for the year

76,985

537,160

614,145

DSG applied in the year

72,841

537,160

610,001

Unapplied grant carried forward to 2007/08

4,144

-

4,144

3

Non-distributed costs

In accordance with the Best Value Accounting Code Practice (BVACOP),

the additional pension costs for added years and early retirements

are not charged to individual services; they are aggregated as

non-distributed costs. Further details of pension costs

are included in note 6.

34

4

Change in provisions

31 March

Change in 2005/06

31 March

2005

Central

Service

2006

Provision

Provision

£'000

£'000

£'000

£'000

Insurance claims

-5,313

2,866

-2,360

-4,807

Contract terminations

-67

-

-18

-85

Part-time pensions

-1,100

-

-

-1,100

Grant loss

-1,200

-

1,200

0

Other

-29

-

-2

-31

Provisions identified in the balance sheet

-7,709

-6,023

Provision for doubtful debts (included

-576

-2,017

with debtors in the balance sheet)

2,290

-1,180

31 March

Change in 2006/07

31 March

2006

Central

Service

2007

Provision

Provision

£'000

£'000

£'000

£'000

Insurance claims

-4,807

1,995

-1,473

-4,285

Contract terminations

-85

-92

-177

Part-time pensions

-1,100

1,100

0

Other

-31

-

0

-31

Provisions identified in the balance sheet

-6,023

-4,493

Provision for doubtful debts (included

-2,017

410

-55

-1,662

with debtors in the balance sheet)

3,505

-1,620

The insurance provision represents an assessment of the likely cost of liability claims

known to the County Council at 31 March 2006. The risks covered are:

Liabilities

Employer's liability, public liability and professional indemnity up to

an aggregate loss of £14 million in any one year. Should this limit ever

be exceeded the maximum liability for any one claim would be £5 million.

Property

Buildings owned by the County Council and those leased to the County

Council where the lease allows for loss or damage as a result of fire,

lightning, explosion and (for schools only) major storm and flood. Contents

owned by the County Council for loss or damage as a result of fire,

lightning, explosion and theft. All risk cover for IT equipment in the computer

suite, and for cash on premises and in transit (limits depending on location).

Additional cover

Personal accident of staff on duty

Fidelity guarantee

Vessels

Council departments currently continue to perform services on contract where functions

have been transferred from the Council. The contract termination provision recognises

that the Council is likely to incur certain costs when these arrangements eventually end.

A House of Lords' decision enables some part-time employees to claim

retrospective membership of the Hampshire Pension Fund. This provision coverd the

potential liability of the County Council for retrospective employers' contributions,

but no contributions will now be payable.

35

5

Internal trading accounts

The trading units had an overall surplus of £2,009,000 (2005/06 overall deficit

of £75,000) as follows:

2005/06

2006/07

£'000

£'000

Former Direct Services Organisation

Income

-23,345

-24,809

- provides catering and cleaning services

to schools and some non-educational

Expenditure

23,231

24,639

sites in Hampshire and supplies vehicles

to departments of the County Council.

Surplus(-)

-114

-170

Education Business Units

Income

-26,992

-28,016

- provide support services principally

to schools but also to other

Expenditure

26,532

27,506

departments and other local authorities.

Surplus(-)

-460

-510

Information Technology Services

Income

-31,471

-33,650

- provided to County Council

departments and some other local

Expenditure

32,432

32,608

authorities.

Deficit/Surplus(-)

961

-1,042

County Supplies

- operate the central purchasing

Income

-9,236

-9,702

warehouse and arrange direct delivery

and other contracts for County

Expenditure

9,120

9,542

Council departments, other local authorities

and voluntary organisations.

Surplus(-)

-116

-160

Hampshire Printing Services

Income

-2,345

-2,294

- provide printing and reprographic

services to County Council

Expenditure

2,313

2,288

departments.

Surplus(-)

-32

-6

Six other smaller trading units

Income

-1,468

-1,714

- including a surplus of £77,000

(£83,000 surplus in 2005/06) on the

Expenditure

1,304

1,593

management of the River Hamble.

Surplus(-)

-164

-121

Total deficit/surplus(-)

75

-2,009

36

6

Pensions

As part of the terms and conditions of employment of its staff, the County

Council provides retirement benefits. These will not be

payable until employees retire but the Council has a commitment to

make the payments that need to be disclosed (in accordance with

Financial Reporting Standard (FRS)17)

at the time that employees earn their future entitlement.

The County Council participates in two pension schemes:

a) The Teachers' Pension Scheme for teachers - this is an unfunded

defined benefit scheme. However, scheme liabilities cannot be

attributed to individual local authorities on a consistent

and reasonable basis. So, in accordance with FRS17, pension costs

are recorded as if the scheme was a defined contribution scheme.

b) The Local Government Pension Scheme (LGPS) for other employees - this

is a funded defined benefit scheme, administered by the County Council.

Employers and employees pay contributions into a fund at a level

estimated to balance pension liabilities with investment assets.

Since 2003/04, pension costs have been charged to the Income and

Expenditure Account in accordance with FRS 17. In 2006/07, pension

assets and liabilities have been included in the Balance Sheet based

on a formal actuarial valuation for 31 March 2004. This valuation has

been rolled forward to 31 March 2007. A formal valuation will be

carried out later in 2007.

6a

Teachers' Pension Scheme

This is a defined benefit scheme administered by the Department for Education

and Skills (DfES). The scheme is unfunded, which means that the pensions of past

employees are paid for by present employers' and employees' contributions.

However, the DfES has established a notional fund as the basis of calculating

the employers' contribution. Contributions were at the rate of 13.5% until December 2006,

and have been 14.1% since January 2007 (13.5% for the whole of 2005/06).

In 2006/07 total employer's contributions were £43.4 million (£41.8 million in 2005/06).

6b

Local Government Pension Scheme Current service cost

The current service cost is an estimate, at today's prices, of the true economic cost of

employing people in a financial year, earning years of service that will eventually

entitle them to the receipt of a lump sum and pension when they retire.

This is included in the net cost of services in the Income and Expenditure

Account. However, the charge met by taxpayers is based on employer's

contributions payable in the year. This is achieved by adjusting

the Income and Expenduture Account balance in the General Fund

reconciliation on page 29.

37

The LGPS fund's actuary has advised that the current service cost of

pensions in 2006/07 is £58.6 million (£50.0 million in 2005/06).

In 2006/07 the County Council paid an employer's contribution of

£46.0 million into the Hampshire County Pension Fund (£39.8 million in 2005/06).

This was 16.5% of pensionable pay (15.0% in 2005/06).

The contribution rate is determined by the Pension Fund's actuary

(Hewitt, Bacon & Woodrow), based on valuations every three years.

The actuarial valuation of the Fund as at 31 March 2004 resulted in the

actuary recommending a phased increase in the employers' rate.

The rate was 225% of employees' contributions in 2004/05, 250%

in 2005/06 rising to 275% in 2006/07, and 295% in 2007/08.

6c

Past service cost of pensions

Past service costs arise from decisions taken in the current year,

but whose financial effect is derived from years of service earned in earlier years.

This includes added years (now replaced by augmentation of service)

awarded on early retirement.

The actuary has advised that the past service cost for early

retirements in 2006/07 is £1.98 million (£2.5 million in 2005/06).

This includes £0.6 million for teachers as the County Council

is responsible for all pension payments relating to added

years awarded by the County Council and for

meeting the additional cost of early retirement.

This is included in non-distributed costs in the Income

and Expenditure Account, in accordance with

BVACOP, but a charge of £1.2 million (£2.3million in 2005/06)

has been made after adjusting for the difference between

actuarial assumptions and estimated cashflow in 2006/07.

The past service cost for early retirements in previous years

is assessed by the actuary at £39.5 million in respect of teachers'

pensions (£38.62 million in 2005/06) and £29.1 million in respect of

unfunded benefits to former employees in the LGPS

(£28.61 million in 2005/06). This is added

to the pension liability in the Balance Sheet.

However, as for current service costs, the charge for

council tax-setting purposes is based on the cash paid in the

year. In 2006/07 contributions paid to cover the cost of early

retirements were:

2006/07

LGPS

Teachers

Total

£'000

£'000

£'000

Early retirements in 2006/07

1,047

475

1,522

Early retirements in previous years

2,160

2,160

4,320

for which payments are still being made

Total payments in 2006/07

3,207

2,635

5,842

38

6d

Adjustments to the Income and Expenditure Account in accordance with FRS 17 are set

out below.

2005/06

2006/07

£'000

£'000

Included in the Income and Expenditure Account:

Current service cost of pensions

50,000

58,630

Charge to non-distributed costs for early

2,327

1,186

retirement in the year

Interest cost on pension liabilities (note i)

72,890

77,520

Expected return on Pension Fund assets (note ii)

-53,930

-63,430

14,090

71,287

73,906

Excluded from the Income and Expenditure Account:

Employers' contributions to the

-39,800

-46,045

Local Government Pension Scheme

Added years and early retirement cashflows

-4,857

-4,941

in the year

-44,657

-50,986

Net adjustment to the Income and Expenditure Account

offset by pension reserve contribution

26,630

22,920

note i - interest cost is the amount needed to unwind the discount applied in calculating the

current service cost. As members of the scheme are one year older and one year

closer to receiving their pension, the provisions made at present value in previous

years for their retirement costs need to be uplifted by a year's discount to keep pace

with current values

note ii - the expected return is a measure of the return (income from dividends, interest etc.)

expected in the long-term on the investment assets held by the scheme for the year.

39

6e

Assets and liabilities relating to retirement benefits

An independent actuary (Hewitt, Bacon & Woodrow) assessed the

share of the assets and liabilities of the Hampshire LGPS

scheme attributable to the County Council and also the unfunded

benefits for teachers and LGPS members. The actuary estimated that

the following overall assets and liabilities for pension costs should be

included in the balance sheet.

31 March

31 March

2006

2007

£m

£m

Estimated liabilities in the scheme

Hampshire Pension Scheme

1,501

1,601

Unfunded Liabilities:

Teachers

39

40

Other Staff

29

29

1,568

1,670

Estimated assets in the scheme

979

1,061

Net liability

589

609

The net deficit on the local government scheme will be made good by increased

contributions over the remaining working life of employees, as assessed by the

scheme actuary.

40

6f

Basis for estimating assets and liabilities

Liabilities have been assessed on an actuarial basis using the projected

unit method. This estimates the pensions that will be payable in future

years, based on assumptions about mortality rates, salary levels etc.

The main assumptions are as follows:

2005/06

2006/07

% per year

% per year

Rate of discount for scheme liabilities

4.9

5.3

Rate of increase in salaries

4.5

4.7

Rate of increase in pensions in payment

3.0

3.2

Rate of increase in deferred pensions

3.0

3.2

Proportion of employees opting to take

a commuted lump sum

50.0

50

Rate of inflation

3.0

3.2

Rate of return on equities (shares)

7.3

7.7

Rate of return on bonds

4.3

5.3

Rate of return on property

6.3

6.7

Rate of return on other assets

4.6

5.6

Average long term expected rate of return

6.5

6.9

Assets are valued at fair value, mainly market value for investments,

and consist of the following categories, by proportion:

31 March

31 March

2006

2007

%

%

Equities

70.3

67.2

Bonds

20.6

20.7

Property

4.0

4.5

Corporate bonds

0.0

2.7

Other assets

5.1

4.9

100.0

100.0