Explanatory Foreword

1. Introduction

1.1. This document contains Hampshire County Council's statement of accounts for the year ended 31 March 2009. 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 2008/09 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 2008/09 are set out on pages 9 to 99.

2.2. They consist of:

· Statement of accounting policies

· annual governance statement

· 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 (GAAP)

· 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 the purposes of setting council tax

· Statement of Total Recognised 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 2009

· 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. Since the introduction of the new schools funding arrangements in 2006/07, most of the County Council's income comes from Specific Government grants and the council tax. A new general grant has been introduced in 2008/09, the area based grant, from the amalgamation of a number of grants previously paid as specific government grants. Inclusive of area based grant, 12% of the County Council's income was derived in 2008/09 from the national business rate and general government grant. Interest is earned on day-to-day balances.

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

	2007/08 %	2008/09 %
Council tax	29	29
National business rates	6	7
General Government grant	1	1
Area based grant	-	4
Fees, charges and interest	14	13
Specific Government grants	50	46
	100	100

In 2008/09 there was no significant change in the balance of income obtained from the various funding sources, apart from the reclassification of some specific government grants as area based grant.

4. What the money is spent on

4.1. Type of expenditure

	2007/08 %	2008/09 %
Staff costs	57	56
Running expenses	40	39
Capital financing	3	5
	100	100

4.2 Service shares of gross revenue expenditure

	2007/08 %	2008/09 %
Children's services and Education	63	69
Adult Social Care	22	19
Highways, roads and transport	5	4
Cultural, environmental and planning services	8	7
Other services	2	1
	100	100

The service shares of gross expenditure in 2008/09 are affected significantly by charges to the income and expenditure account to take account of the reduced market value of land and buildings in 2008/09, which have a greater impact on Education than other services. But for this factor, service shares in 2008/09 would have been similar to those in 2007/08.

5. Employees

5.1. In 2008/09 the County Council employed 41,010 people, making the Council one of the largest employers in the county. Many of these employees work part-time. In full-time equivalent (fte) terms, the total number of employees was 28,095 at 31 March 2009, 1,289 higher than at 31 March 2008, mainly as a result of additional school-based staff, the staffing of new children's centres financed by government specific grant and the transfer of the Connexions service from direct central government funding, together with other additional staff funded by additional grants or income..

5.2. Full-time equivalent employees

6. Summary of the year - Revenue account

6.1. In 2008/09 the County Council continued to pursue its objective of providing services that are of well above average quality, while setting one of the lowest Band D council taxes. The County Council continues to receive transitional support through the grant floor and thus received, along with other floor authorities, the lowest increase in Government grant of all county councils - 2.0% in 2008/09. The budget was also framed in the context of the significant demographic and legislative pressures affecting social care services, alongside the successful achievement of the Adult services two year financial recovery plan linked to the modernisation of services. Despite the pressures on the budget, the County Council has continued to improve the quality of its services with improvements in 58% of the national indicator set for which baseline data is available,, while maintaining a council tax in the lower quartile. Cash-releasing efficiency improvements assessed at £26.1 million (3.9%) have been identified in 2008/09, inclusive of the carry forward of surplus efficiencies in excess of the Spending Review 2004 target ,above the 3% annual target set for local authorities in 2008/09. Cumulative cashable improvements since 2004/05 amount to £70 million..

6.2. The County Council also maintained an excellent rating from the Audit Commission in the Comprehensive Performance Assessment for the seventh year running, accelerating its positive direction of travel , by also being assessed as improving strongly.

6.3. The main components of the 2008/09 budget, revised budget and actual income and expenditure are set out below:

Budget	Original budget	Revised budget	Actual	Variation from revised
	£million	£million	£million	£million
Net cost of services	697.9	678.6	1,149.9	471.3
(Surpluses)/ deficits on trading units	-0.5	0.3	-3.4	-3.7
Net interest payable	21.4	13.3	7.4	-5.9
Loss/(gain) on disposal of assets	-	-	3.2	3.2
Pension interest cost and expected return on pensions assets	15.3	31.9	31.9	-
Net operating expenditure	734.1	724.1	1,189.0	464.9
Amount to be met from Government grant and local taxpayers
Council tax precept income	-500.1	-500.1	-500.1	-
General Government grant	-17.4	-17.4	-17.4	-
Area based grant	-64.3	-64.7	-64.7	-
National business rates	-125.2	-125.2	-125.2	-
	-707.0	-707.4	-707.4	-
Deficit for the year on the Income and Expenditure Account	27.1	16.7	481.6	464.9
Contribution to capital	29.2	51.6	51.5	-0.1
Excess of depreciation, impairment net of grant over statutory provision for debt repayment	-42.7	-53.5	-531.4	-477.9
Contribution from pensions reserve	-20.6	-15.1	-15.1	-
Net cost of soft loans and reversal of disposal gain	-	-	-3.2	-3.2
Contribution to/(from) earmarked reserves	6.3	-5.8	5.4	11.2
Movement in General Fund Balance	-0.7	-6.1	-11.2	-5.1
General Fund Balance
Brought forward 1 April 2008	-15.1	-23.3	-23.3	-
Carried forward 31 March 2009	-15.8	-29.4	-34.5	-5.1

6.4. The budget requirement for 2008/09 was set at £642.7 million ( net of area based grant of £64.3 million), an increase of 4.4% on the adjusted budget for 2007/08. The budget was influenced by the risks associated with demand led budgets, inflation, land disposals and the achievement of savings within the budget. This resulted in a risk assessment of the required level of general balances of approximately £15 million and balances at 31 March 2009 were estimated at £15.8m, including a contribution of £0.7 million to balances in 2008/09. The budget included provision for above-inflation increases of £7.7m in social care budgets and for the anticipated increase in the cost of the waste management contract, while other budgets were increased in line with corporate inflation assumptions. .Cashable efficiency savings of £15.0 million were identified, mainly available to be redeployed within service budgets as a way of meeting demand and legislative pressures not accommodated within the budget guidelines for services. The budget required a 4.5% increase in the Band D council tax to £999.00.

6.5. In June 2008 the final accounts for 2007/08 were reported. Service cash-limited spending was £3.4 million lower than budgeted. Taking account of lower insurance costs, the transition to higher pay costs from the Pay and Benefits project and other factors, the net cost of services was £14.4 million below the revised budget. Allowing for interest savings and higher trading unit surpluses, net operating expenditure was £23.8m lower than estimated; the requirement to make revenue contributions to capital to finance capital expenditure in 2007/08 was £11.9 million lower than forecast. £27.5 million of these savings were transferred to earmarked reserves, resulting in an underspending of £8.2 million against the General Fund compared with the revised budget. The General Fund therefore increased to £23.3 million at 31 March 2008. Additional non-recurring spending of £3.1 million was approved to be financed from this underspending with the remaining £5.1m being used to reduce the proposed council tax increase in the provisional budgets for 2009/10 and 2010/11 from 3.5% to 3%, resulting in a forecast general fund balance of £20.9 million at 31 March 2009.

6.6. When services revised their budgets in the autumn, some significant changes were made in the budget to reflect the economic changes that had occurred during the summer and autumn of 2008.Initially concerns about higher inflation and the slowdown of the property market had been the dominant factors, but following a global banking crisis in the early autumn requiring government intervention, action was taken in the UK using both fiscal and monetary policy to stimulate the economy. Official interest rates were reduced sharply to the lowest level in the history of the Bank of England. In the revised budget, services identified savings of £10.6m to be carried forward within earmarked reserves into 2009/10. Other savings totalled £10.7 million mainly resulting from lower interest rates, additional interest on higher balances and lower waste volumes. £1.5m was added to revenue contributions to capital to reduce the level of unsupported borrowing required to compensate for delayed capital receipts, increasing the estimated balance on the general fund by £8.5 million to £29.4m at 31 March 2009. £6.0 million of this increase was used for one-off investment purposes in 2009/10 and £2.5 million to reduce the council tax increase in 2010/11.

6.7. Prior to closing the 2008/09 final accounts it had become clear that an impairment review of all the County Council's assets valued at market value would be required and because of the circumstances associated with the creation of the revaluation reserve that this would require a substantial charge to be made to the income and expenditure account. This review together with the transfer of five schools to trust/ foundation status accounted for approximately £468 million of the increase in the net cost of services in the 2008/09 final accounts, though the impact on the general fund and thus on council tax is neutral. Service cash limited expenditure was £0.8 million lower than budgeted and further savings of £15.5 million in net operating expenditure were achieved mainly as a result of lower interest costs, lower fire insurance reinstatement and higher trading unit surpluses. £11.2 million of these savings were transferred to earmarked reserves, resulting in an underspending of £5.1m against the General Fund compared with the revised budget. The General Fund therefore increased to £34.5 million at 31 March 2009.

6.8. The table below analyses the main factors:

	Over/ under(-) spending	Contribution to/from(-) reserves	Net over/ under(-) spending
	£million	£million	£million
Service cash-limited spending	-0.8	0.8	-
Trading unit surpluses	-3.7	3.6	-0.1
Interest savings	-5.9	1.4	-4.5
Insurance provision	-3.1	3.1	-
Unallocated central contingency	-2.3	1.6	-0.7
Highways Winter maintenance	0.3	-	0.3
Other variations	-0.8	0.7	-0.1
	-16.3	11.2	-5.1

6.9. In view of the decision in the 2009 national budget not to revise the 2010/11 local authority grant settlement already announced provisionally but to tighten the spending assumptions for 2011/12 to 2013/14, the decision was taken to carry forward the £5.1m added to balances to 2011/12 to reduce the council tax increase required to support the provisional 2011/12 budget from 3.8% to 2.8%.

7. Summary of the year - capital expenditure

7.1. In 2008/09 the County Council spent £193.6 million on capital projects, £19.5 million 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 £18.6 million lower than forecast. So expenditure on locally resourced projects was only £0.9 million lower than estimated.

7.3. Capital receipts available to finance capital expenditure in 2008/09 were £3.3 million lower than forecast, as a result of property market conditions but this was partly offset by additional unsupported borrowing for specific projects and increased funding from specific reserves of £1.4million. As a result capital expenditure of £11.7m was financed from the capital reserve, £1m higher than estimated..

7.4. Spending financed from supported borrowing amounted to £16.4 million, supplemented by increased unsupported borrowing of £47.3 million. Unsupported borrowing on a temporary basis was about £25m higher than originally planned as a result of the slowdown of the land disposal programme. Debt repayment in 2008/09 amounted to £24.2 million. Potential outstanding borrowing for capital purposes to be serviced by the County Council now amounts to £583.2 million, together with extra debt of £40.8 million for services transferred to the unitary and other authorities. The Council may borrow on a day-to-day basis from internal resources, such as the revenue account and earmarked reserve balances. Internal resources were slightly higher in 2008/09 than in the previous year, so that net of temporary investments, £258.3 million (an increase of £13.0 million on the previous year) was owed to external lenders at 31 March 2009.

8. Pension Fund liability

8.1 The County Council's pension liability has increased from £440.3 million at 31 March 2008 to £727.6 million at 31 March 2009, following a reduction in the liability of £170.1m in 2007/08. The volatility of this liability is the result both of movements in the market value of the fund's investments and in the level of corporate bond rates, used to discount future liabilities back to present value, relative to inflation assumptions. In 2008/09, the increased liability is mainly the result of the reduced market value of the fund's investments. The deficit on the Pension Reserve reduces the County Council's net worth from £2.6 billion to £1.9 billion

9. Changes

9.1 There are no significant changes to the County Council's range of functions in 2008/09, though the scale of Children's Services has increased both by the transfer of the Connexions service from the South Central Connexions Partnership and the implementation of the children's centre programme. The transfer of five schools to trust or foundation status has resulted in their fixed assets no longer being within the control of the County Council and has resulted in a charge to the income and expenditure account of £82.7m with compensating adjustments through the Statement of Movement on the General Fund balance. Two other changes have also had a significant impact on the presentation of the Income and Expenditure account.

9.2 A new form of non-ringfenced general government grant was introduced in 2008/09, the area based grant, derived from a number of previous specific grants. This is accounted for in the Income and Expenditure account as a general funding source rather than being deducted from the net cost of services. This treatment has the effect of increasing net operating expenditure by £64.7 million in 2008/09.

9.3 Though fixed assets apart from infrastructure and community assets have been included in the County Council's balance sheet on a current cost basis since 1995, the accounting arrangements in the Local Authority Code of Practice operated on a simplified basis until 2007/08. This did not require information on the historic cost of assets to be recorded as would have been necessary to maintain a UK GAAP- compliant revaluation reserve. In introducing the revaluation reserve, it was not possible for local authorities to establish reliably the historic cost of their assets and therefore current cost at 1 April 2007 was adopted as the basis of historic cost and the revaluation reserve was introduced with a nil balance. This has some significant implications on the accounting for lower market values in 2008/09 as a result of the property market situation.

9.4 Because the revaluation reserve is immature, the impact of past revaluations is largely reflected in the Capital Adjustment Account rather than the Revaluation Reserve and therefore the main impact of market value impairment of land and buildings in 2008/09 falls on the income and expenditure account rather than being written off to the revaluation reserve. The net cost of services is increased by approximately £385 million in 2008/09 as a result of impairments and this together with the change in the status of five schools with net fixed assets of £83 million largely explains the greatly increased deficit on the income and expenditure account in 2008/09 of £482 million. A compensating contribution from the Capital Adjustment Account within the Statement of Movement on the General Fund balance neutralizes the effect of this deficit on the General Fund balance and if market values recover in future years this impairment charge will be reversed in the Income and Expenditure account in later years.

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].