Revenue and capital budget monitoring report 2011/12 - period 2

Report: 5
Date: 21 July 2011
By: Director of Resources on behalf of the Commissioner

Summary

This report is the first monitoring report on the MPS/MPS finances for 2011/12 and shows the revenue position at Period 2 (May 2011). The revenue budget is forecast to overspend by £25.2m (0.8% of budget) before any account is taken of the budget resilience provision. The Capital Programme as at the end of Period 2 shows year to date expenditure of £16m. This total represents 8.6% of the annual budget of £186.3m.

The major issues are:

• A continuing over-strength position within Territorial Policing and management of the reductions driven through the TP Development Programme.
• Business Groups are forecasting a year-end Police Officer strength of 32,295. This is 25 posts below the original target strength of 32,320 as per the 2011-14 Budget & Business Plan but 46 posts above the revised target strength for 2011/12 of 32,249.
• Later than planned finalisation of match-funding agreements and other cost-sharing posts resulting in reduced income.
• In-year budget pressures on the delivery of a number of major change programmes.
• A potential budget pressure between the estimated cost of the early departure programme and the earmarked reserves available.

A. Recommendations

That members are invited to

1. Note the year to date and forecast position for revenue and capital budgets.
2. Note a revised Police Officer target strength for 31 March 2012 of 32,249 to account for the centralisation of training budgets.
3. Approve a budget virement of £1.4m as set out in paragraph B46.

B. Supporting information

Background

1. The Commissioner has outlined our vision of a balanced policing model with safety, confidence and value for money at its core. Within that vision the MPS is committed to delivering excellent policing from tackling Anti-Social Behaviour and other crime in neighbourhoods through to dealing with terrorists and the most serious criminals often ‘behind the scenes’. However, it is doing that within a financial climate of an expected reduction in its spending (compared to its 2010/11 budget) of some £600m by 2014/15. For 2011/12 the Service has identified savings to be delivered this year of £163m.

2. This paper provides a forecast against the revenue and capital budgets for the MPA/MPS in 2011/12 based on the position at the end of May 2011. It includes information on the major change programmes and the forecast savings arising from them. It also includes information on any changes to the deployment plan and budget allocations from those approved by the MPA Full Authority meeting on 31 March 2011.

Revenue Forecast by expenditure/income type

3. The overall Period 2 revenue forecast outturn is an anticipated overspend of £25.2m before any account is taken of the resilience (£25.1m) which is built into the 2011/12 budget. Further detail is provided at paragraphs 42 to 44 below. It should be noted that historically the Business Groups tend to be very prudent in early assessments of the forecast position and there is time to address this situation but it is important that the causes of the forecast overspend are identified and corrective action taken. The issues identified in this report are being discussed and remedial plans formulated by MPS Management Board.

4. With gross expenditure in the region of £3.5bn there are many variances and explanations within the headline figure but in broad terms pay budgets are marginally overspent with overspends on overtime and running costs and an under-recovery of Income.

5. A number of major change programmes are underway with a target of delivering £138.8m of savings in this financial year. The focus of these change programmes and the other reductions built into the budget is on:

• reducing its inanimate costs
• delivering an effective business and operational model including
  • undertaking process improvement activity
  • sharing services with and across the MPS
  • exploring a range of outsourcing and joint ventures
• only then reducing operational officers and PCSOs

There is significant risk associated with change of this scale and already challenges in implementation have arisen as programmes are developed and progressed. However at this stage in the financial year the indications are that the majority (£121.6m) of the savings will be delivered. Work, however, continues to maximise savings on these programmes in the current year. Further detail is provided at paragraphs 37 to 41 and at Appendix 3 (Exempt).

6. The 2011/12 budget, as finally approved, reflected a complex picture in terms of officer and staff strengths and movement between different categories as the Service moved to a new operating model with significantly less traffic wardens and PCSOs. The Service is working hard to avoid, as far as is practically possible, redundancies. This has involved internal:

• recruitment of PCSOs to officer training posts and
• redeployment opportunities for Traffic Wardens, primarily to PCSO posts

The timing of these recruitment and redeployment programmes has meant it has been difficult to assess the budget impact at the start of the year. Budgets will be amended during the year as the programme phasing becomes clearer. The current forecast against officer and staff budgets can be summarised as follows:

Table 1 - Summary of Pay forecast variances at Period 2

7. Police Officer Pay - An overspend of £1m - 0.1% of budget.
As a result of the recruitment pause during 2010/11 and the movement of PCSOs to officer posts in March, the actual strength on 1 April 2011 was 32,459. The planned establishment for Police Officers in 2011/12 is 32,320 as stated within the Policing London Business Plan 2011-14. The movement towards this planned establishment throughout the year will be slower than previously anticipated. However, the current average cost per officer is marginally higher than that budgeted which explains the forecast overspend on police pay.

8. Within the overall overspend of £1m there are some significant intra-business group variances, in particular, Territorial Policing is estimating:

1. an overstrength position throughout the year due to a continuing slow movement of officers to specialist commands
2. an understrength of specifically funded posts which will be matched by a reduction in income (also see Other Income at paragraph 24)
3. revisions to a number of major change programmes - see paragraphs 37 to 41 and Appendix 3

The Olympics Programme also has an underspend of £3.2m as some projects are experiencing issues in recruiting officers and staff due to the contracts being short term. This is matched by a reduction in the specific grant funding for the Olympics.

Work is continuing to speed up postings to specialist and specifically funded posts.

9. There is also a potential budget pressure relating to Special Priority Payments where the full savings are currently forecast to be achieved but there could be a requirement to make unbudgeted payments in 2011. This position will be the subject of regular updates and is included within the major change programmes summary.

10. Police Staff Pay - An overspend of £5.4m - 0.9% of budget.
In order to manage reductions as efficiently as possible a star chamber was established last year and continues to operate. At the end of May, the actual number of staff in post was 13,786. This means that there needs to be a growth of 1,015 staff numbers in the remainder of the financial year to achieve the planned year end strength of 14,801 reflected in the 2011-14 Policing London Business Plan.

11. In general there are underspends forecast within police staff pay in all Business Groups, other than Territorial Policing where some staff are held awaiting redeployment to other Business Groups, and in the Directorate of Information due to the delays in realising reductions from the Lean Programme. It is now thought that the estimated savings from the review of Police Staff terms and conditions is unlikely to be delivered in full in 2011/12, thus placing further pressure on police staff pay budgets which has been reflected in the overspend forecast. There are potential mitigating factors against this forecast in that Business Groups tend to be optimistic towards the level of recruitment for the remainder of the year. We anticipate that the forecast position is likely to reduce through the year as recruitment expectations are reconsidered.

12. PCSO Pay - An underspend of £4.5m - 3.1% of budget.
In anticipation of budget decisions, vacancies were held in 2010/11. That, together with the movement in March of 193 PCSOs to officer posts meant the actual strength in April was 4,098 compared with the planned April strength of 4,246, reducing more quickly than planned to 3,825 by March 2012. The forecast underspend reflects the current expectation of movement of PCSOs to officer posts and vacancies. There may need to be some realignment between PCSO and officer salary budgets as the phasing of officer recruitment becomes clearer.

13. Traffic Warden Pay - An overspend of £0.8m - 15.9% of budget.
A new model for delivery of the Safer Transport function has been agreed between the MPS and TfL. The new model involves less reliance on traffic wardens with the disbandment of the Service during the year. At the start of the year there were 184 traffic wardens in post who have been offered early departure terms and opportunities for redeployment where practical.

14. Following finalisation of the new operating model with TfL and agreement to the proposed transition arrangements, some alignment of budgets is necessary which is expected to eliminate this overspend by Period 3.

15. Police Officer Overtime – An overspend of £4.5m - 4.5% of budget.
The forecast overspend is mainly due to a number of increased demands on the MPS, such as the Royal Wedding, the visit to the UK by the US President and costs relating to increased protection of foreign embassies.

16. Whilst it should be noted that the forecast expenditure is still £4.6m lower than the 2010/11 outturn position and one of the lowest levels of expenditure in this area for many years, the high profile events mentioned above have impacted considerably on expenditure to date. Towards the end of the last financial year there was an increase in public order activity for policing marches and demonstrations. It is reasonable to assume such activity will continue and therefore there is a risk that the forecast overspend on officer overtime will increase.

17. Police Staff Overtime – An overspend of £2.0m– 7.5% of budget.
The forecast overspend is primarily within Territorial Policing relating to managing vacancies within the Central Communications Command and planned savings targets relating to TP development programmes which are not currently forecast to be achieved in full in 2011/12.

18. Employee Related Expenditure – A minor variation.
The forecast includes £3.3m for costs relating to Phase 1 of the current early departure programme which is funded by a matching transfer from reserves. See paragraphs 35 to 36 for more information on the early departure scheme.

19. Premises Costs – An overspend of £0.6m – 0.3% of budget.
This is mainly within Central Operations, and relates to increased costs for firearms facilities at the PFI site at Gravesend which is to be funded from Counter Terrorism budgets.

20. There is also a potential cost pressure of £1.8m on the Corporate Real Estate Programme as a result of slippage on other programmes.

21. Supplies and Services - An overspend of £11.6m - 2.7% of budget.
This is primarily within Specialist Operations (£5.6m) and relates to Counter Terrorism expenditure for which the budget provision is in other subjective areas, primarily within Police and Police Staff pay. The budget allocations will be adjusted in Period 3 to reflect the realignment thus reducing the overspend in this category. There are also forecast overspends in Specialist Crime due to PNC, Crimestopper and Forensic charges, and in the Directorate of Information due to higher than budgeted costs of telephony services and external contractors. A full analysis of the budget pressures within this category will be undertaken to ensure that overall expenditure is contained within budget.

22. Capital Financing Costs – an underspend of £5.6m -10.4% of budget.
The underspend relates to a reduction in the minimum revenue provision (MRP) linked to a decision to fund capital expenditure in 2010/11 from capital reserves rather then borrowing. Also, there is an underspend forecast in relation to interest on external loans reflecting the decision to take out short term variable rate loans (2 years) that currently attract a lower rate of interest than those used in calculating the budget requirement.

23. Interest Receipts – no variation from budget.

24. Other Income - An under-achievement of £7.7m – 2.6% of budget.
This is primarily within Territorial Policing (£4.5m), where there is an under-recovery of funding from partner organisations for Police Officer and PCSO posts. This mainly relates to the match-funding scheme (£2.8m) for which the budget assumed funding for 115 police officers for a full-year where as the forecast assumes that these agreements will not now be finalised until later in the financial year. Also, there are forecast reductions in funding for other cost sharing posts where local authorities have yet to confirm the available funding. Additionally there is an under recovery in Human Resources, due to reduced secondment of Police Officers and staff, matched by reduced expenditure.

25. Discretionary Pension Costs - a minor variation.
As stated in the provisional outturn report considered by the MPA Finance and Resources Committee on 23 June, a challenge has been made to the way the MPS calculates injury pensions resulting in a potential budget pressure.

26. Specific Grant – an under-achievement of £3.2m – 0.7% of budget.
The underachievement is primarily within the Olympics Security Directorate, where the grant level matches reductions in forecast expenditure, principally within Police Officer and Police Staff Pay. This is, in part, offset by an overachievement (£1m) on the estimated value of Loan Charges Grant based on the current level of debt held by the Authority.

27. New Development TP have obtained approval to develop Multi-Agency Safeguarding Hubs (MASH) with partner agencies and have identified initial funding of £1m in 2011/12 within existing budgets to allow the implementation of the first phase of six boroughs on a pilot basis. This in-year budget transfer will be actioned at Period 3.

28. Appendix 2 sets out the revenue forecast by business group. The main variances are explained above.

Deployment Plan

29. The Policing London Business Plan 2011-14 reflected a planned strength of 32,320 at March 2010. The plan is now being revised to 32,249 (-71) to reflect the latest information on the phased implementation of the Training Change Programme. This revision will have no impact on operational capability or on the published deployment plan for 2012/13 and beyond.

30. The Deployment Plan 2011/12 currently assumes annual wastage of 1,300 officers. At the end of Week 13 (26 June) the assumed wastage was 295 officers. The actual wastage was 343, slightly ahead of forecasts but within the parameters of our planning assumptions. Wastage is monitored on a weekly basis to ensure that any significant variances are picked up immediately and plans revised to address any issues that may arise.

31. The selection processes for the planned 2011/12 intakes are well advanced and we currently project to have sufficient candidates to fill all the planned intakes and deliver the revised 31 March 2012 target strength of 32,249. The forecast yields from the new model of police recruit training will be closely monitored as any variance in success rates through the Police Law and Community course will affect our ability to deliver the target strength. However, as can be seen from Table 2, which provides details of police officer numbers compared to target strength by Business Group, Business Group forecasts suggest a marginally higher year-end figure than planned (32,295) and this is the subject of discussions with Business Groups.

32. Monthly meetings will now take place to ensure the reported deployment plan strengths are consistent with Business Group expectations.

Table 2 – Police Officer Actual Strength v Target Strength

The revised strength results from a reduction of 71 posts in Training reflecting the new operating model developed as part of the Training Change Programme.

33. The variance in target strength between the Business Groups remains an issue as the forecast overstrength position within Territorial Policing is offset by vacancies held within the specialist groups. The challenge will be to manage the reductions, which will be arise from the TP Development Programme, and re-deploy those officers into budgeted posts. The impact is expected to be felt particularly at sergeant level, where the Training Service Improvement Plan has already delivered a reduction in the region of 50 posts together with the 150 sergeant posts which will be removed from the SNT model this financial year.

34. The vacancies within the specialist business groups do not match the displaced officers in terms of rank and skill set. There is a considerable volume of internal selection activity being driven by Specialist Crime Directorate and Specialist Operations which aim to fill current and forecast vacancies. However, there are barriers to success as the level of experience within Territorial Policing cannot always provide suitably skilled officers to meet the demands within the specialist business groups.

Early Departure Scheme

35. As indicated, the savings reflected in the 2011/12 budget are dependent on a significant reduction in staff posts. To facilitate this process, the Authority has allowed access to earmarked reserves of £52.3m to support the Service’s early departure scheme. Phase 1 of the scheme started in November 2010 with Phase 2A which started in April 2011 and Phase 2B in June 2011. Approval to funding for Phase 3 was agreed by the Authority in June 2011.

36. To date 844 staff (excluding Catering Services) have accepted voluntary departure terms. The current estimated commitment against the reserves for Phases 1 and 2A which have now closed is some £32m. Any cost in excess of the available reserves of £52.3m will be an additional pressure to be managed within the Service’s approved budget.

Revenue Forecast - Major Change Programmes

37. Appendix 3 (Exempt) provides a summary of the budgeted savings and the current forecast savings in 2011/12 for the major change programmes together with emerging risks which have not yet been reflected in the forecast. The budgeted savings are those included as part of the 2011-14 budget process plus any savings agreed as part of any previous budget process. The overall position can be summarised as follows:

Table 3 - Revenue Forecast Against Major Change Programmes

38. It is inevitable given the scale of reductions required and the timescale for developing the 2011-14 budget that there would be variations on the budget assumptions for these programmes as:

• business cases were developed
• interdependencies and overlaps between programmes were identified
• the timetable for delivery was tested

39. Table 3 above shows that there is currently £17.2m of potential under-achievement of savings in the forecast position for 2011/12. The main causes of these variances are outlined earlier in the report. The underachievement of £4.7m for the Territorial Policing Development programme represents variations against the original planned savings for a number of projects. Reports have been considered by the MPS Governance Board which identified the revised profile of savings and these changes which will be reflected in the developing 2012-15 budget. Whilst there is an overall forecast overspend against the total Territorial Policing budget in 2011/12, this is largely due to the current overstrength position within the Business Group and the underachievement on the Development programme is being managed by underspends elsewhere within the TP budget.

40. In addition to the £17.2m forecast under-achievement, there is a further risk of £9.8m for which explanations are provided in Appendix 3 (Exempt).

41. As previously indicated, the 2011/12 budget reflected the delivery of £163m of savings. In addition to the major change programmes the other main savings that are currently forecast to be delivered in full, can be summarised as follows:

• Officer and Staff Pay Freeze (£14.6m)
• ATOC agreement - tax passed on to officers (£4m)
• Reduced non-pay budgets in SCD (£3.7m)
• NSY Rates Rebate (£2.5m)
• Residential Rent Income (£2m)
• Reduced Forensics and Intelligence staff (£2m)
• Additional Income - City Airport (£1m)

In addition, there are the following savings that are currently at risk of delivery:

• Police Officer Overtime in Territorial Policing (£2.3m) - there is currently a £1.1m overspend forecast within Territorial Policing within police overtime.
• Reduction in third party legal provision (£2m) - a detailed review of the provision will be undertaken in the near future to establish whether the budget is sufficient given the likely amount of outstanding claims.

Budget Resilience

42. Given the uncertainties relating to the delivery of planned savings, resilience of £25.1m was built into the budget. This provision is being held centrally and not allocated to Business Groups even when budget pressures emerge. Every effort is being made to manage such pressures within existing budgets.

43. As reflected in this report, however, the forecast overspend at year end is £25.2m before account is taken of the budget resilience provision. In addition, as previously indicated, there are a number of other potential pressures to be managed which have not been included in the forecast, i.e.:

• early departures
• discretionary pension costs
• change programmes
• Public Order events

44. The Service’s aim remains, if possible, to retain the budget resilience provision in order to support the delivery of major change programmes in 2012/13 and beyond.

45. Budget movements The MPA/MPS Business Plan was approved by MPA Full Authority on 31 March 2011. Since that time, budget amendments have been made for a number of reasons. Appendix 1 shows the subjective budget movements that have been made since the approval of the original budget submission and the presentation of this report. The major budget movements undertaken since approval of the MPA/MPS Business Plan are shown below in Table 4.

Table 4 - Major budget movements actioned since approval of the MPA/MPS Business Plan

46. In addition, members are asked to approve the following budget virement (a permanent budget move between different categories of expenditure):

• Movement of £1.4m from Police Officer and PSCO Pay into Traffic Warden Pay and Police Staff Pay relating to a revision in the profile of staffing changes relating to Safer Transport.

47. Movements in Reserves Following approval of transfers to reserves at the MPA F&RC meeting on 23 June, the opening balance on MPS reserves for 2011/12 is £269.6m. The reserve movements undertaken since the beginning of the financial year are shown below in Table 5.

Table 5 – Reserve movements carried out since the beginning of the financial year.

Capital monitoring

48. A first review of the Capital Programme for 2011/12 has been undertaken. This takes account of project slippage during 2010/11 and the requirement for funds to be carried forward between financial years to enable schemes to be completed. The opportunity has also been taken to (a) add emerging schemes of high priority; and (b) re-profile existing projects based on the available capacity of the provisioning departments.

49. This report is based on the proposed revised Gross Budget of £227.2m, less over programming to a net funded budget of £186.3m which is considered elsewhere on this agenda. Should Management Board or MPA adjust the proposal the control values will be adjusted in P3 monitoring.

50. A level of over-programming has been retained. This is to ensure that dynamic management of the capital programme can continue. Projects experiencing ‘slippage’ can be accommodated within the overall capital funding envelope for 2011/12. The level of over programming is considered manageable but will be kept under close review by Capital Programme Steering Group (CPSG) & Management Board to ensure proper consideration is given to Service priorities.

51. A review of staffing levels in the Directorate of Information is presently taking place. A reduction in numbers is expected which may have an impact on available resources to deliver the revised capital programme. The full effect of this change will not be known for some time. It is expected that an update will be available at the end of Quarter 2.

52. In examining actual expenditure incurred up to the end of Period 2 it is noted that many year end accruals undertaken for 2010/11 have not yet been invoiced or recalculated. This position will be closely monitored to ensure an accurate projection of expenditure for 2011/12 can be achieved.

53. Reports generated from the Capital Management System on SAP/MetFin have been designed to monitor the capital programme in a different style to those used in 2010/11. The MPS will continue to develop the reporting formats throughout the forthcoming months.

54. Improvements to capital processes and data quality/consistency are being driven via the Capital Management System User Group and the CPSG which both meet on a monthly cycle. Users are being reminded of key principles, i.e.:

• Project budgets are for the duration of a project. Projects do not require specific annual re-approval of their in year value.
• Project forecasts must cover a project’s whole life cost, showing sums for each financial year with monthly profiles for the current year.

Period 2 (as at end of May 2011) - Summary Position (Appendix 4)

55. Year to date adjusted expenditure is £16.0m, representing 8.6% of the Programme Budget (i.e. after taking allowance for over-programming) of £186.3m. We are expecting a further changes to budget as the Home Office and ACPO (TAM) clarify their 2011/12 expectations. Progress will be closely monitored to ensure expenditure remains within budget.

List of Appendices

• Appendix 1 - Summary of MPS revenue expenditure and budget movements
• Appendix 2 - Subjective Analysis of revenue expenditure by Business Group
• Appendix 3 - Summary of Revenue Forecast against Major Change Programmes at Period 2 (Exempt)
• Appendix 4 - Summary of Capital expenditure and funding against budget

C. Other organisational and community implications

Equality and Diversity Impact

1. Equality Impact Assessments are completed on business group activities undertaken where there is deemed to be an impact. The equality and diversity implications are identified in business cases and reports on individual proposals through our normal decision making process.

Consideration of MET Forward

2. Met Forward recognises that the MPS has to make challenging financial decisions whilst minimising the impact on front line policing. This report outlines the current financial position against the budget approved by the Authority (Policing London Business Plan, 2011-14).

Financial implications

3. The financial implications are those set out in this report.

Legal implications

4. Any legal issues arising in respect of MPS early departure programme will be dealt with through DLS as appropriate. There are no further legal issues arising.

Environmental implications

5. There are none specific to this report.

Risk Implications

6. Risk management is integrated into the Service’s budget, business planning and performance management processes. Business Groups and Management Board monitor risks on a regular basis. This report sets out the financial risks and pressures currently being managed by the Service.

D. Background papers

• Policing London 2011-14 Budget & Business Plan

E. Contact details

Report authors: Nick Rogers, Director of Finance Services, MPS

For more information contact:

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

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