Contact: Nick Gibbins, (01962) 84 7544; [email protected]

1 Summary

1.1 Service cash-limited spending in 2006/07 was £7.3m higher than originally budgeted, but £3.8m lower than forecast in the revised budget. Lower spending was mainly the result of:

· Additional savings achieved by Adult Services against the financial recovery plan targets, resulting in an overspending of £7.5m against the 2006/07 budget, rather than the £10.9m estimated in the revised budget

· Children's Services being able to achieve savings to cover an estimated overspending of £0.2m on the non-schools budget (a projected overspending of £0.3m on the Schools Budget has also been avoided)

· A small underspending on the Policy and Resources budget with both Environment and Recreation and Heritage spending almost exactly in accordance with the cash limit.

1.2 These trends had been anticipated in the final 2006/07 service budget monitoring reports submitted to Executive members and were reflected in the provisional outturn data presented to the Cabinet in May. The Cabinet in February agreed that subject to the overall impact on the County Council's balances being contained within £10.9m that any balance of the 2006/07 contingency within the Adult Services budget (£2m in the revised budget) be carried forward to 2007/08 to assist in meeting budget pressures. Assuming a carry forward of £2m is approved together with 50% of Policy and Resources and Environment's underspendings, the net impact on balances of higher service spending in 2006/07 is a reduction of £9.4m.

1.3 Net savings of £4.9m have been achieved on other budgets in accordance with the provisional outturn data presented to the Cabinet in May, from:

· additional interest on balances, savings on business rates and a reduction in the provision for doubtful debts (£3.4m)

· lower waste management contact costs than budgeted (£0.4m) and a grant of £0.8m allocated by the DTI on 28 March 2007 towards costs incurred in separating hazardous electrical waste

· lower spending on highways winter maintenance, as a result of the mild winter

1.4 Overall spending is therefore £4.5m higher than budgeted, but £6.4m lower than the revised budget. The report elsewhere on the agenda highlights the County Council's improved performance against the Best Value and Local Area Agreement performance indicators in 2006/07, particularly in relation to the national indicators for adult social care. In this context, the final accounts position represents a positive outcome given the need to achieve savings during the course of 2006/07 to accommodate increased Adult Services spending pressures brought forward from 2005/06.

1 Recommendations

a) that the variations in service cash-limited expenditure, as set out in Table 1, be approved

b) that the accounts be closed on the basis that:

· Environment and Policy and Resources retain 50% of their underspendings, and Recreation and Heritage carries forward its overspending to 2006/07, in accordance with the County Council's financial management policy

· Adult Services overspending in 2006/07 be written off in accordance with the Financial Recovery Strategy and that the unallocated contingency of £2m within the Adult Services 2006/07 budget be carried forward to 2007/08.

c) that adjustments and variations on other budgets, as set out in Table 3 be approved

d) that a sum of £1.8m be earmarked from the addition to balances for the additional spending proposals outlined in paragraph 5.2

e) that an invest to save contribution of £175,000 to fund restructuring costs in the libraries service be approved, repayable over the period 2008/09 to 2010/11

f) that contributions to and from earmarked reserves be made as set out in Appendix 4 and the draft protocol set out in Annex 2 to the appendix be approved

g) that the report on the County Council's treasury management activities as set out in Appendix 5 be approved

h) that the prudential and financial health indicators set out in Appendix 6 be approved

i) that the backward look annual efficiency statement for 2006/07 be approved for submission to Communities and Local Government, as set out in Appendix 7

j) that the final accounts of the County Council for 2006/07 be approved

k) that the final accounts of the Hampshire Pension Fund contained in Appendix 8 be approved

l) that progress in implementing financial management policies, as set out in Appendix 9, be noted

m) that capital payments for the year be financed as set out in Table 3 of Appendix 10

n) that the carry forward of capital schemes from 2006/07 to 2007/08 as set out in Annex 4 of appendix 10 be noted

o) that services' capital programme cash limits for 2007/08 be increased by the sums shown in:

· column 6 of the table in Annex 1 to Appendix 10 (to reflect the carry forward of capital schemes and the balance of cash limits from 2006/07)

· columns 3 and 4 of the table in Annex 7 to Appendix 10 (to reflect services' share of capital receipts)

p) that the partnership accounts for 2006/07 set out in Appendix 11 be noted in recognition of the County Council's responsibility for financial stewardship.

2 Service cash limits

2.1 Variations in service spending against the revised cash limits set out in Appendix 1 and against the 2006/07 revised budget are as follows:

Table 1 2006/07 outturn variations

2.2 Service spending is therefore close to the revised budget, after a more significant variation in 2005/06. Competitive figures for recent years are:

Table 2 Trends in service spending against the revised budget

The position on each service is summarised in the following section of the report:

Adult Services (+£7,494,000)

2.3 A revised budget for 2006/07 was agreed in February at £10.9m above the cash limit, inclusive of an unallocated contingency of £2m against the possible effect of winter and other unforeseen spending pressures. No significant winter pressures were experienced last winter and together with the impact of a further reduction in client numbers during the year (but still more than originally budgeted for) and progress on the modernisation of services, particularly Home Care, savings of £3.4m were achieved against the revised budget, resulting in an overspending of £7.5m against the cash limit.

2.4 The Cabinet in February agreed to write off the estimated overspending of £10.9m against balances and that if a lower overspending was achieved at the year end that the first call on any savings would be to allow the unallocated contingency sum to be carried forward to 2007/08 to assist in dealing with budget pressures in 2007/08. It is proposed therefore that £2m of the saving of £3.4m be carried forward by Adult Services to 2007/08.

Children's Services (-)

2.5 The revised budget assumed an overspending of £233,000 against the cash limit on the non-schools budget, mainly as a result of higher spending on children's social care of £1.8m, largely offset by savings on education services and by a planned use of £300,000 of the surplus retained by Education business units. It was proposed that the overspending should be covered by use of part of Children's Services share of the reward grant from the first round of local public service agreements. In the event spending pressures on Children's social care were contained at a lower level than anticipated, at £1.4m above the adjusted cash limit and it was possible to balance the outturn against the cash limit for the non-schools budget using the majority of the Education business unit surpluses set aside for this purpose.

2.6 2006/07 has been the first year of the new schools funding arrangements involving the introduction of a new schools specific grant, the Dedicated Schools Grant (DSG). This grant is ring-fenced and therefore to the extent it is not required to finance school's budget shares and actual central spending within the Schools Block has to be carried forward to the following financial year. Unless there is an overspending against the Schools Budget requiring the County Council to provide temporary funding from balances which can then be recovered from DSG in the following year, the Schools Block outturn is automatically in line with the cash limit, as the cash limit is adjusted for any carry forward of DSG. A small overspending of £328,000 was predicted in the revised budget, but the end of year position has resulted in spending in line with the cash limit, but with a DSG carry forward into 2007/08 of £4.1m. £1.6m of this carry forward was planned with the agreement of the Schools Forum in order to maximise the availability of General Sure Start grant to support the development of Children's centres. A further £1.6m of the carry forward is due to slippage in DSG funded capital repairs. In addition schools have collectively added £3.5m to their revenues.

Environment (-£29,000)

2.7 As anticipated in the latest Executive member budget monitoring report, spending on Environment was very close to the cash limit with no significant variations to the pattern of spending between services reflected in the revised budget.

Policy and Resources (-£173,000)

2.8 Policy and Resources produced a revised budget at the cash limit but incorporating savings of £359,000 to be identified in the remainder of the year mainly to offset pressures on budgets relating to land and property holdings and the Coroner's Service. The subsequent budget monitoring report identified savings of £217,000 towards the required savings to be identified and some further savings are incorporated in the final accounts, producing an outturn £173,000 (0.3%) below the cash limit.

Recreation and Heritage (£12,000)

2.9 The Recreation and Heritage outturn was almost exactly at the cash limit, as predicted in the latest Executive member budget monitoring report. The decisions taken in the revised budget together with some further savings on the Arts, Sports and Community and Policy Development budgets have enabled spending pressures on the Libraries and Information Services budget to be accommodated within the cash limit.

Carry forward of over and underspendings

2.10 The County Council's financial management policy allows 50% of unplanned underspending to be carried forward to 2007/08 and requires services to plan on the assumption that 100% of any overspending will be carried forward. The Cabinet has already agreed that the Adult Services recovery plan would need to be phased over two financial years and that therefore subject t0 satisfactory progress in implementing the recovery plan it would be necessary to write off a further overspending in 2006/07. It is proposed that the financial management policy should be applied to the small under and overspendings incurred by Environment, Policy and Resources and Recreation and Heritage Services in 2006/07

Cash limit adjustments

2.11 Appendix 1 shows the adjustment made to cash limits since the revised budget for 2006/07 and Appendix 2 analyses the main variations between actual spending and the cash limit for each service.

3 Other budgets

3.1 The overall underspending on the budgets is £4.9m. A full analysis of the variations is contained in Appendix 3.

Contingency (-£443,000)

3.2 Contingency provisions of £2.8m were retained in the revised budget to cover increases in the waste management contract in the third and fourth quarters (£2.5m) and to allow for a contribution to affordable housing schemes from council tax second homes income (£0.3m). The subsequent allocation for waste management contract costs was £2.1m, mainly as a result of slower growth in waste volumes than assumed. It is proposed to transfer the second homes income contingency sum to the second homes income earmarked reserve, so that the outcome of the planned Homebuy Schemes in New Forest, East Hampshire and Test Valley which hopefully will be launched in 2007/08, can be monitored.

Business rates (-£226,000)

3.3 The invest to save contribution to the funding of a team to review business rate valuations has generated further business rate savings against the revised budget, mainly in respect of office accommodation. Savings relating to schools business rates are now ringfenced within the schools budget.

Capital financing charges (£27,000) and interest on balances (-£2,784,000)

3.4 Capital financing costs are very close to the estimate with the average interest rate payable of 5.3%, being marginally higher than the 5.29% forecast in the revised budget. Favourable capital and revenue cash flows have resulted in higher interest on balances than forecast in the revised budget.

Insurance (-£1,996,000 offset by an equivalent reserve contribution)

3.5 The contribution to or from the insurance provision is based on the value of claims paid in the year and the change in the assessed value of outstanding liabilities. A reduction of £2m in the provision for insurance liabilities has arisen mainly because of a continuation in the more favourable trend in employers and public liability claims.

3.6 A review of liability premiums for the next three year period will be undertaken in conjunction with the review of the three year budget plan, but it is proposed that the saving of £2m in 2006/07 be transferred to the insurance reserve, which is sufficient to fund outstanding reinstatement costs relating to major fires in previous years but does not cover the risk of further fire damage on a scale which could not be covered solely from current premium levels.

Highways winter maintenance (-£215,000)

3.7 Following a number of years in which the cost of snow clearance and salting operations have exceeded the four year average on which the budget is constructed, a saving of £0.2m has arisen in 2006/07 as a result of below average activity levels as a result of the mild winter.

Doubtful debt provision (-£410,000)

3.8 The County Council's policy is to make a provision against a proportion of debts which are more than one year old proving to be irrecoverable, together with any more recent debts which are known to be doubtful. An increase in the provision of £774,000 was required in 2005/06 mainly reflecting an increase in outstanding debt with the National Health Service, which has returned to more normal levels in 2006/07, enabling a reduction in the provision to be made.

Provision for part-time pensions (-£921,000 offset by an equivalent contribution to the job evaluation transitional costs reserve)

3.9 A provision has been included in previous years' accounts since 2000/01 to cover potential backdated employers' contributions following a European Court ruling regarding the rights of part-time workers to join pension schemes. It has now been established that in the event of any successful claims no specific backdated employers' contribution will be required with any strain on the pension fund being dealt with as part of the triennial actuarial valuation. Costs of £29,000 were incurred in 2006/07 in defending claims and a further sum of £150,000 has been earmarked to deal with legal costs associated with outstanding claims. This leaves a saving of £921,000 against the provision of £1.1m which it is proposed should be transferred to the job evaluation transitional cost reserve to cover potential legal costs associated with equal pay compensation claims arising from the Pay and Benefits review.

Specific grants (-£869,000)

3.10 Additional specific grant of £0.9m was received as a result of grant allocation decisions for 2006/07 made at the end of the financial year. A grant had been anticipated but at an unspecified level to compensate for additional costs incurred by local authorities in separating hazardous electrical waste within the waste stream, as a result of the delayed introduction of producer responsibility for these costs. A grant of £804,000 for 2006/07 was allocated on 28 March 2007. The grant receivable under the Local Authorities Business Growth Incentive (LABGI) scheme was announced at the end of February and was marginally higher than the forecast £1m included in the revised budget.

Revenue contributions to capital

3.11 As explained in Appendix 10, capital projects to the value of £164m were committed during 2006/07 and capital expenditure of £173.2m requires financing in 2006/07, £18.9m lower than estimated. However actual payments in 2005/06 and estimated payments in 2006/07 exceeded the available local resources by £6.7m funded temporarily by unsupported borrowing, £8m of the reduced spending was on projects funded by government approvals or scheme specific funding and capital receipts were £2.8m lower than estimated. As a result all but £1.4m of the budgeted revenue contributions will be required to finance expenditure in 2006/07 and it is proposed to transfer the saving of £1.4m to the general capital reserve to assist in funding the higher capital expenditure which will be incurred in 2007/08 and later years, as a result of lower expenditure in 2006/07.

Summary - other budgets

3.12 These variations can be summarised as follows:

Table 3 - Summary of variations on other budgets

3.13 The overall position is therefore a net overspending of £4.5m (0.8%) for the year (£9.4m overspend on services, offset by a £4.9m underspend on other budgets). However the overspending is £6.4m less than anticipated in the revised budget.

3.14 The decision taken by the Cabinet last July to add £14.5m to balances in 2006/07 to cover the impact of Adult Services' higher spending in 2005/06 carrying forward into 2006/07, included the use of £5m from earmarked reserves (£2m of the corporate share of the Landfill allowance reserve, £1m of PSA reward grant and £1m from business unit reserves) which it was suggested might be returned pro-rata at the end of 2006/07 if the end of year position was better than anticipated. It is recommended that any decision on whether to return part of these contributions should be deferred until the success of the overall two year Adult Services financial recovery plan can be gauged at the end of 2007/08.

3.15 Based on the recommendations about the carry forward of service over and under spendings and the earmarking of some of the savings on other budgets, the overall position is as follows:

Table 4 2006/07 outturn

4 Spending proposals

4.1 The reduced level of overspending in 2006/07 will result in the County Council having a higher level of balances available in 2007/08 and in subsequent years to deal with the substantial budgetary risks facing the County Council, which are likely to be exacerbated by the outcome of Government spending review (CSR07). It will also provide some increased flexibility in considering how best to allocate the County Council's resources in support of the priorities of the Corporate Business Plan. A further risk assessment on the level of balances will be required in reviewing the three year budget plan during the Autumn.

4.2 However in view of the improved position at the end of 2006/07, there are three proposals which could be considered to approve additional spending funded from balances:

· The Cabinet at its previous meeting in May approved the principle of providing financial support in the form of a capital grant towards the implementation of regeneration proposals at Rowner.

· The Leader at his July decision day will be considering a request from the University of Winchester for a financial contribution towards a Community Sports centre project in partnership with Winchester City Council and Sport England. A further contribution towards the cost of relocating the Trinity Centre, Winchester is also under consideration.

4.3 It is proposed to earmark a sum of £1.8m for these purposes.

4.4 An invest to save reserve contribution of £0.7m was included in the 2007/08 budget specifically for improvements in Adult and Children's Services designed to transform service provision and improve value for money from 2008/09 onwards. Business cases for potential projects have yet to come forward for consideration and it is proposed that the purposes for which the reserve is applied be widened to include other projects, such as the libraries restructuring.

4.5 The current proposals to restructure the library service affecting both headquarters and locally based services are likely to generate significant up front transitional costs which will be recovered by means of staffing savings in the medium term. An invest to save contribution of £175,000 towards the transitional costs for restructuring the library service, is proposed which would be repayable over the three year period to 2010/11.

5 Balances

5.1 Taking into account the spending proposals in paragraph 4.2 above, the closure of the 2006/07 accounts has the following impact on the level of balances:

Table 5 Balances

6 Earmarked reserves

6.1 Earmarked reserves are £10.6m higher than budgeted at £109.6m at 31 March 2007 mainly as a result of the recommendations to earmark 2006/07 savings contained in this report. Details of the movements in reserves during 2006/07 and of the protocol for each of the main classes of reserve are set out in Appendix 4.

7 Treasury management

7.1 The County Council's treasury management policy requires an annual report to the Cabinet on the exercise of the treasury management function. Details are set out in Appendix 5.

8 Prudential indicators

8.1 The prudential code for capital finance in local authorities includes a number of prudential indicators for which actual indicators for the year as well as budgeted indicators require approval. Appendix 6 summarises the relevant indicators for 2006/07's outturn which are in accordance with the policies approved by the Cabinet. A number of the prudential indicators are included within the Financial Health indicators in the Medium Term financial strategy approved by the Cabinet in May and the appendix also reviews the end of year position for the remaining indicators.

9 Annual efficiency statement

9.1 The County Council is required to submit its 2006/07 backward look annual efficiency statement (AES) based on actual performance in 2006/07 to Communities and Local Government in July 2007. The statement requires the approval and certification of the Leader, Chief Executive and County Treasurer.

9.2 Appendix 7 summarises the proposed improvements included in the County Council's submission, which is attached as an annex. The submission indicates that after allowing for the inclusion of efficiency gains in 2004/05, 2005/06 and 2006/07 the three year target for 2005/06 to 2007/08 at 2.5% per annum will be achieved a year early.

10 Pension fund accounts

10.1 The separate accounts for the Hampshire Pension Fund are also submitted for approval as Appendix 8. The value of the funds assets has increased from £2.7bn to £ 2.9bn during the course of 2006/07.

11 Financial management policy

11.1 The County Council's financial management policy incorporates both the financial planning policies that underpin the County Council's medium term financial strategy and policies relating to the provision of financial services. Appendix 9 highlights the progress made in 2006/07 in implementing the policy.

12 Partnership accounts

12.1 Details are included in Appendix 11 of partnerships for which the County Council is the accountable body, but where no other reporting to members of the County Council takes place and the full expenditure and income of the partnership is not included in the County Council's revenue accounts.

13 Assurance statement

13.1 The Code of Practice on Local Authority Accounting in the UK requires the County Council within its Statement of Accounts to publish a statement of internal control signed by the Leader and Chief Executive. As part of this process, the Chief Internal Auditor provides an independent opinion on the adequacy and effectiveness of the system of internal control operating in each department and in the County Council as a whole. These opinions are reviewed by the Governance Committee. Appendix 12 contains the overall statement and concludes that the County Council has a appropriate framework of control that provides reasonable assurance regarding the effective, efficient and economic achievement of the County Council's objectives. Audit testing has shown that the controls are working in practice with some specific exceptions.

14 Impact Assessment

14.1 Decisions on the final accounts are taken in accordance with the Council's financial management policy, which applies equally to all services ensuring consistent financial management.

Section 100 D - :Local Government Act 1972 - background documents

The following documents discuss facts or matters on which this report, or an important part of it, is based and have been relied upon to a material extent in the preparation of this report.

NB: the list excludes:

1. Published works

2. Documents which disclose exempt or confidential information as defined in the Act.

(Quote list of documents here: either "none" if 1 or 2 above apply; or list the relevant letters, memos, etc and their location).

None

Summary of Appendices