2002/03 revenue budget

Report: 07a
Date: 28 February 2002
By: Treasurer and the Commissioner

Summary

The report sets out the final approved budget for 2002/03. Arrangements for the management of the budget are set out for the Committee's approval.

A. Recommendations

The Committee is recommended:

1. To note that the final approved budget for 2002/03 is unchanged from that submitted by the Authority on 10 December 2002.
2. To note the budgetary control framework (Appendix 1) and support the actions to improve budget management set out in Appendix 2.
3. To agree the continuation in 2002/03 of the virement arrangements put in place for 2001/02, with the additional requirement that proposed virements in excess of £0.5 million are notified to the Treasurer (paras 10-12).
4. To note the arrangements for securing delivery of the budget provision for £60 million savings (para 13).
5. To approve the list of expenditure items to be held back from delegation and the monitoring arrangements to assess whether they can be released during the year (para 14-16).
6. To review the proposals for budget management in the light of the motion passed by the GLA Assembly (para 17).

B. Supporting information

Approved budget

1. The Mayor's final budget proposal for 2002/03 was passed unamended at the meeting of the Assembly on 13 February 2002. The component budget for the MPA has accordingly been approved unchanged from the draft agreed by the Authority on 10 December 2001.

2. The final grant settlement was announced on 30 January 2002. There were only marginal changes in the Authority's grant entitlement which were reflected in the Mayor's budget proposals with corresponding adjustments to the precept.

3. The following table provides a brief summary of the final approved budget and its funding.

4. The bid for additional resources next year for counter-terrorism remains outstanding. The Government's response is unlikely to be known until the Chancellor's Budget which is now scheduled for 17 April. The Chair of the Authority has made further representations to the Home Secretary that this continuing delay is very unsatisfactory. The need to recruit additional officers for this purpose and for the new Transport Police OCU, which the Mayor has confirmed will go ahead within the budget approved for TfL, may restrict the number of officers funded from the precept that can be physically recruited and trained during next year. In that event the Mayor has indicated that the unspent balance of the provision for 1,000 extra officers should be placed in a reserve and used for the recruitment of additional officers in 2003/04.

5. The MPS Management Board is currently considering where the full officer growth should be allocated. As reported previously there are a number of proposals for increasing resources in high priority areas of operational policing. The final decision is made more difficult with the delay of an announcement regarding the counter-terrorism proposals. However it has been decided that at least 314 additional officers will be allocated to boroughs to support the requirements for implementing the agreed resource allocation formula.

Budget management 2002/03

6. In each of the last two financial years budget management has proved problematical. In 2000/01 an overspending emerged late in the year. In the current year a substantial adverse variation to the outturn forecast appeared part way through the year which threatened to eliminate the Authority's general reserve and which required the extraordinary savings measures carried out under the eagis of the MPS Budget Star Chamber.

7. For 2002/03 the reserves position remains fragile. Furthermore the requirement to achieve budget savings of £60 million is challenging. In this context it is essential to ensure that the budget management arrangements are as robust as possible. In order to minimise the risk of losing control of the budget during 2002/03 steps are being taken under three headings:

• budgetary control arrangements
• savings implementation plan
• holdback of budget

8. Internal Audit, on behalf of the Treasurer and working with the MPS Finance Department, have developed a budgetary control framework which sets out the key controls at each stage of the budgetary process. This is intended to be a generic statement which can be applied to any particular set of organisational arrangements. It can therefore, for example, fit any level of budget devolution. The framework is attached at Appendix 1.

9. On the basis of the key controls for managing the budget during the year the Treasurer has identified a series of questions which need to be addressed. The MPS has provided an initial response which has helped to clarify the areas where specific measures need to be taken to strengthen budget management in 2002/03. This dialogue is summarised in Appendix 2. The actions identified in the appendix are currently being taken forward.

10. For the current year it was agreed that this Committee would have to approve budget virements of over £1 million. Virements below £1 million are approved by the Resource Allocation Committee of the MPS and reported to members through the budget monitoring mechanism. No budget virements were to be allowed in the first and fourth quarters. It is proposed that these arrangements remain in place for 2002/03.

11. However, at its last meeting, the Committee agreed that additional flexibility in the 2002/03 budget should be used at the Authority's discretion:

• To avoid overspending arising from genuine unbudgeted pressures after all other options for containing expenditure have been considered.
• To protect against non-achievement of the required £60 million savings by supplementing the savings list.
• To improve the financial resilience of the Authority by adding to reserves.

12. In order to safeguard the Authority's position without removing the discretion allowed by the virement rules within the delegated budget it is proposed that virement proposals above £0.5 million are notified to the Treasurer to enable the Authority to intervene if it is considered appropriate.

13. In order to drive forward the delivery of the savings requirement the Director of Resources has established a Budget Savings Team led by Commander Given. An action plan is being prepared for each of the savings proposals, including the savings on police overtime against present spending levels. The progress in delivering savings against this action plan will be included in the monthly budget monitoring reports.

14. A further safeguard against the adverse effect of any loss of control over the budget is to hold back from delegation an element of the budget until the effectiveness of the budget management can be assessed in practice. A sum of £10 million against the following budget headings is under discussion between the Treasurer and Director of Resources:

15. The expenditure held back would not be incurred until the second half of the year. It is proposed to review the position on the basis of the monitoring at the half year stage with the intention of releasing these budget provisions if the budget is considered to be sufficiently under control. Although the MPS will need to plan for the expenditure of the provisions held back the monitoring should be against the budget as delegated in order to ensure there is a clear picture of spending performance.

16. It should be noted that the MPS has allocated the full list of identified savings, amounting to £63.8 million, to appropriate budget managers. The additional capacity represented by the excess of £3.8 million over the budget provision of £60 million is being held at the centre within the delegated budget. There is a significant risk that the excess savings will not be achieved, which is why the budget provision was capped at £60 million. To the extent that the identified savings are achieved above the budgeted level they will be available within the delegated budget, subject to the virement provisions outlined in paragraphs 11-13 above.

Motion by GLA Assembly

17. Following approval of the budget for 2002/03 the GLA Assembly passed a motion, of which that part relevant to the MPA is as follows:

'The Assembly resolves to draw to the attention of the Functional Bodies the report of the Budget Committee to the Assembly of 23 January 2002 and in particular:

To request the Metropolitan Police Authority to withhold from the total sum delegated to the Metropolitan Police Service at the start of the next financial year a substantial sum to mark the concern that the MPS make significant progress towards financial efficiency and effectiveness, having particular regard to the centrally held budgets (which include provision for new initiatives, savings and inflation not yet allocated); to the budget item for additional officers (pending its becoming clear whether the planned number of officers can be recruited); and to the general reserve.'

18. The Committee will need to review the plans for budget management set out in this report in the light of that motion.

Future budget management

19. There is a clear commitment on the part of both the Commissioner and the Authority, with the support of the Mayor, to enhance devolved budget management in the future. A separate report on this agenda sets out progress in achieving this objective. Devolved management will not make a significant contribution to the improved budget management in 2002/03 but it should be a major factor from 2003/04 onwards. The short term measures required to provide confidence in budget management in 2002/03 should not be allowed to distract from the medium term strategy of strengthening financial management through greater devolution.

C. Financial implications

These are as set out in the report.

D. Background papers

Mayor's budget report to the GLA Assembly 13/02/02

E. Contact details

Report author: Peter Martin, MPA.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix 1: Budgetary control framework

Control objective: 1. Budgets are effectively planned and properly approved to meet the objectives of the MPS, MPA and the Mayor.

Key controls and principles:

1.1 The medium term MPA/MPS corporate objectives are clearly defined and are supported by a medium term financial plan to meet the agreed priorities.

1.2 MPA/MPS objectives are clearly defined – corporate and annual priorities.

1.3 The budget process accurately reflects the structure and operations of the MPS.

1.4 A realistic timetable is agreed and adhered to for budget preparation and approval to meet the requirements of the MPS, MPA and GLA.

1.5 Adequate guidance for the preparation of annual budgets to meet the requirements of the MPA, GLA and the Mayor is issued to all appropriate staff on a timely basis.

1.6. Assumptions and factors underlying the budgeting system are relevant and accurate.

1.7 Realistic budgets are proposed (in accordance with the guidance) by those responsible for the business area.

1.8 Business plans and cases are prepared in support of budget proposals, clearly stating the link to corporate objectives and the requirements of the Mayor.

1.9 Business plans and cases are properly approved.

1.10 Budget proposals are independently scrutinised and prioritised in line with corporate objectives and the requirements of the Mayor.

1.11 The MPA budget is properly approved.

Control objective: 2. Budget responsibility and accountability are clearly defined, appropriately allocated and regularly reviewed.

Key controls and principles:

2.1 Budget responsibility and accountability are allocated in line with operational responsibilities.

2.2 The role of all those involved in the budgeting process is transparent and clearly defined.

2.3 The processes underpinning budgetary control are clearly defined and issued to all appropriate staff.

2.4 Adequate training is provided in line with budget responsibilities.

2.5.1 The role of all those involved in the budgeting process is clearly understood and individuals are held to account for decisions/action taken.

2.6 Budget responsibilities are independently reviewed on an annual basis.

Control objective: 3. Budgets are effectively managed, properly monitored and accurately reported.

Key controls and principles:

3.1 The financial information system is structured to provide the appropriate level of financial detail.

3.2 The financial information system is updated in accordance with the agreed budget allocations and all Business Groups informed.

3.3 Delegated authority levels are clearly defined and all expenditure is properly certified by an authorised officer.

3.4 All items of expenditure/income are properly brought to account.

3.5 Accurate budget forecasts are produced, variances promptly identified and appropriate action taken.

3.6 The overall budget position is reported on a regular basis to the MPS Management Board and the MPA.

Control objective: 4. Budget requirements are effectively reviewed during the financial year and any revisions are properly approved.

Key controls and principles:

4.1 The timescale for the periodic review of the budget position (quarterly/half yearly) is agreed and subsequently applied.

4.2 Proposed budget revisions are promptly submitted for approval as part of the periodic review process.

4.3 Any proposed increase in spend is supported by a valid business case. Any potential savings are identified and reported at the earliest stage.

4.4 A scheme of delegation is approved and applied for the authorisation of budget virements.

4.5 Alterations to the agreed budget are properly approved.

Control objective: 5. Budget achievements and lessons to be learnt for the future are identified and effectively used to inform the budgeting process.

Key controls and principles:

5.1 An objective budget outturn review is promptly conducted at the end of each financial year.

5.2 The results of the outturn review are effectively used to inform the budgeting process.

Appendix 2: Budget management 2002-03

1. Question:

Is every £ of budget allocated to a budget manager?

Response:

Need a list of budget managers, the budgets for which they are responsible and amounts totalling back to the overall budget. All elements of the budget are allocated to a responsible officer. The issue of service–wide budgets will be resolved through the devolution process. Registers of responsible officers are updated through the budget setting process. 

Action underway:

1. The 2002/03 budget setting process includes an update of the register of named responsible officers.
2. The devolution project is starting to address the disaggregation of budgets historically held corporately where the spend is driven locally e.g. translation & interpretation services. 

2. Question:

Does every budget manager have a clear statement of his/her budget management responsibilities?

Response:

Neither the MPS Finance Code nor Total Resource Budget Manual that were in force during the Receiver regime has been formally withdrawn. They both contain statements of budget management responsibilities. Work to enhance and update the scheme of delegated budget management is close to completion for formal review by the MPS Director of Resources and MPA Treasurer.

Action underway:

1. Produce statement s for review by DoR & Treasurer.
2. Endorsed by MPS Management Board 
3. Communicate to all relevant levels of MPS management.

3. Question:

What steps are taken to ensure that they understand those responsibilities?

Response:

Those budget managers that have ‘devolved’ budgets will understand their responsibilities, as they have not significantly changed since inception. Senior MPS management increasingly reinforces the importance of budgetary control. The financial awareness training, that over 1,500 staff have attended and that has now started to impact on more senior managers, is having a positive effect. Enhanced training will be a key feature of the implementation plan for the rollout of the revised scheme of delegated financial management.

Action underway:

1. The financial awareness training programme continues.
2. The Finance function investment has focused on developing the capability to support the local budget manager.

4. Question:

How is accountability for budget management enforced?

Response:

Financial performance is part of the performance management role of ACPO Commanders. It is also an important element of the “Going Local “inspection process where relevant business support finance staff accompany ACPO leads on their inspection visits. Detailed budgetary performance information will be reported more frequently to the Management Board and Business Group management teams.

Action underway:

1. Clarify arrangements for all budget managers/holders.

5. Question:

Do budget managers have effective control over the commitment of expenditure against budgets for which they are held accountable?

Response:

Not all budget managers consider that they have effective control over all the expenditure for which they are held accountable. Expenditure in many service-wide areas e.g. Forensics & FMEs is driven by the decisions of others. There are plans to devolve more of the direct technology related budgets such as telephone/line charges and desktop computer support. Managers of local overtime budgets feel the ‘Centre’ through demands for aid and abstraction spends much of their budget. There is a discussion ongoing regarding the creation of an abstraction budget under the control of Pan-London that will reimburse the costs of aid to relevant OCUs. 

Action underway:

1. This issue is a key feature of the devolution project. Treasurer will consider with Director of Resources what measures should be put in place in advance of devolution.

6. Question:

Do all budget managers have access to financial advice and support? 

Response:

All OCUs and Departments will have access to a Finance & Resource Manager or budget manager. In the most part these are not financially qualified. The recent Finance/Inspectorate joint study indicates that people in these posts do not spend the majority of their time on finance. The restructuring and investment in the finance function recognised the need to provide greater professional and consistent financial support to all parts of the MPS. The creation of the Business Support division provides this with named business accountants relating to specific business groups and sub business groups, for example there are 5 business accountants for Territorial Policing, each providing support to a territory comprising 5 or 6 boroughs. This will take some time to demonstrate significant improvement as much of this support has recently arrived. There remains a tendency to introduce finance support and advice late into the decision-making process.

Action underway:

1. Business Support Division to develop its role and ensure that budget managers and FRMs access the enhance level of support available.

7. Question:

Do all budget managers receive relevant, accurate, timely financial management information? 

Response:

All OCUs and Departments have access to the corporate financial system that offers real-time, drill-down information of their cost centres to transaction level. This enables expenditure to be compared to budgets profiled across the year. There are issues about data quality, especially the quality of payroll coding that is a function of both the care and attention taken by MPS staff in notifying the outsource provider of changes/movements and having a payroll system that is not integrated with the finance system and will not be integrated with the new corporate HR system.

 Information from feeder systems (e.g. property transactions) do not regularly contain sufficient detail to give any benefit to drill-down functionality. Many users do not access their financial information during the month, preferring to wait for the month-end download to their local systems to support the monthly forecasting process. The corporate finance system is due to be upgraded/replaced in 2002-03 and there is provision in the capital programme. The resultant development will create a need for intensive training. 

Action underway:

1. Finance Dept are leading work to control the input and resultant output of payroll data.
2. Senior Finance representation sits on the MetHR Project Board to ensure information consistency.
3. Responsibility for the outsourced pay & pensions functions has moved into the Resources Directorate, and is planned to move to Finance during 2002/03.
4. Head of Finance is nominated as responsible as business lead to integrate information solutions for resources.
5. Business Support division of Finance to provide standardised information to each Business Group management team.

8. Question:

Is there a clear understanding that the budget allocated at the beginning of the year is the figure to which they must control with no expectation of any increase during the year? 

Response:

The organisation is aware that there is a process for the agreement of budget changes. The reinforcement of that process is the subject of an explicit section within the revised scheme of budget management almost completed. 

The organisation is dynamic and there is an expectation at the most senior level that budgets are flexible enough to accommodate change. 

This is more easily controllable when the change involves an alteration in line management or command of a function, but more difficult with the creation of new posts or units. There will be more discipline to this aspect of budget management in 2002/03. 

Action underway:

1. The budget monitoring regime will be more robust in 2002/03

9. Question:

How will we ensure timely and reliable monitoring information for 2002-03? 

Response:

Ledgers are closed on the 3rd working day after the end of a month. A marginal improvement to the quality of data will be achievable when the majority of goods order processing is completed online and the quality of “e-goods” receipting is high. This will obviate the need for producing manual journals. Overtime accruals for police pay are a material issue until there is consistent and widespread use of a system that assists in calculating the accrual due based on duties served. The focus needs to be on reducing the amount of time that the business has available to review its financial position and produce year-end forecasts. 

Currently the business is given ten days to produce forecasts and commentaries – there are a number of actions required to shorten the timescale:

• A change in the priority that finance receives at business level,
• Improvements in the IT infrastructure to allow quicker information exchange between the finance system and local forecasting application,
• A change in thinking that encourages business units to consider their forecast projections before the month end, and· A change in the level at which forecasts are completed – they are currently at the account code level.

A hard timetable instilling management discipline at the final part of the process is necessary but the keys are the business process and timescales.

There will always be an intrinsic issue with the accuracy of forecasts given the various operational pressures to be taken into account and the expectations of the degree of accuracy achievable. More emphasis needs to be given to the assumptions underlying the forecasts provided. Timetable to be produced

Action underway:

• Improving the design and content of reports on corporate finance system.
• Explicit quality assurance role of business support accountants. Training in forecasting as part of the financial awareness training programme.
• Support from the Commissioner

10. Question:

What arrangements will be in place for SMT to review the monitoring information? 

Response:

The reporting timetable will include a commitment to take a pre-identified level of monitoring information to a pre-set SMT. Formal reporting to Management Board is not the solution given its timetable for meeting. The timetable will continue to ensure a pyramid of information flow up from budget holder to Management Board to MPA. 

Action underway:

• Transparent timetable

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