2003/04 draft budget

Report: 3
Date: 10 December 2002
By: Treasurer and Commissioner

Summary

The Authority has to review its draft budget for 2003/04 in the light of the Government’s grant settlement which is to be announced on 5 December 2002. This report provides members with existing information, considers potential responses to different grant scenarios, and reminds members of outstanding issues in relation to the budget. Information on the grant settlement and its implications will be tabled at the meeting.

A. Recommendation

1. The Authority is recommended to review the draft budget in the light of the grant settlement referring unresolved issues to the Finance Committee on 12 December.

B. Supporting information

Introduction

1. At its meeting on 31 October 2002 the Authority approved its draft revenue budget for 2003/04 for submission to the Mayor subject to final amendments to be agreed by the Finance Committee. Part 3 of the agreed budget submission which details the 2003/04 draft revenue budget is attached for members only – to reduce printing costs, a copy will be posted on the MPA website or can be inspected by contacting Simon Vile on 7202 0180. The budget is summarised in Appendix A to this report.

2. Members are reminded of the key features of the draft budget as follows:

• The precept increase of 22.9% has been calculated in accordance with the Mayor’s guidance and allows for a net increase in the number of police officers of 1,200, including 200 for transport policing funded by TfL, and also for the release of 450-500 officers from control room duties to operational duties arising from the C3i project.
• The budget includes committed increases of £174.4 million of which £92.4 million is assumed to be specifically funded by additional government grant.
• Savings of £25.9 million have been identified as set out in schedule 3.12 of the submission.
• There is a residual funding gap of £9.6 million, ie the budget as presented in the submission includes expenditure totalling £9.6 million more than the estimated funding.

3. In approving the submission the Authority also agreed that the draft budget would have to be reviewed in December in the light of the grant settlement.

4. In accordance with the statutory procedure the Mayor has to consult the functional bodies before producing his budget for consultation with other stakeholders. This will take the form of a letter which will be circulated to all Authority members as soon as it is received. This may include variations from the original guidance published in May.

Grant settlement

5. The provisional grant settlement for 2003/04 is expected to be announced on 5 December 2002, which allows just two working days before the Authority meeting. A report will be tabled comparing officers’ most up to date interpretation of the grant entitlement resulting from the provisional settlement with the grant estimates included in the budget submission.

6. The MPA’s figures for Revenue Support Grant (RSG) and Non Domestic Rates (NDR) are included as part of those for the GLA as a whole, and will need to be disaggregated. Other police-specific funding streams will be announced on 5th December, but may not be fully clarified by the Home Office until some later date, possibly after the meeting of the Finance Committee on 12 December, which is only five working days after the expected announcement.

7. There is a meeting of the Finance Committee on 12 December which could give further consideration to issues raised by the Authority. The Mayor intends to go out to consultation around 13/16 December. GLA officers have indicated that the consultation may be presented in a flexible form which would allow for outstanding issues to be identified.

Potential outcome

8. Members will be aware that no further hard information has emerged from the Home Office since the original announcement of the Government’s new public spending plans (SR2002) in July. An indication of the increase in police expenditure nationally has been reported recently in the published National Policing Plan. However this is difficult to interpret without information about earmarked funding, and therefore the amount of funding available for distribution by way of the formula, or about changes to the distribution formula itself. Nevertheless it is possible to set out the broad implications of two potential scenarios as set out below:

Scenario A: Grant is less than estimated (or any increase is less than the funding gap)

9. If the grant projected following the settlement is less than or unchanged from the estimates in the draft budget, or improves by less than £9.6 million, the first priority will have to be to eliminate the funding gap. In theory there are a number of possible responses in these circumstances, as follows:

a. Increase the precept beyond its current projection to help eliminate the funding gap. Any such proposal would require immediate dialogue with the Mayor. Even if he responded by including a higher precept increase in his budget proposal to the Assembly in January, the outcome would be critically dependent on the views of Assembly members. At 22.9% the precept increase is already substantial. If in the event a further increase was not approved the Authority would be placed in a very difficult position in February in terms of securing effective management of the budget in 2003/04.

b. Apply part of the existing precept increase to reducing the funding gap. This would have to be achieved either by reducing the costs reflected in the precept calculation or scaling back the expected outcomes, eg the net increase in police officers. There may be opportunities to pursue this option around the cost increase required for 1,000 additional officers. If the precept increase was not reduced correspondingly this would free up precept resources to meet other expenditure and thereby reduce the funding gap. Any such changes would need to be agreed with the Mayor.

c. Draw from reserves. The Treasurer strongly recommends that such a course of action is NOT pursued. Firstly this would not represent a permanent solution. Once spent reserves are no longer available. This option would therefore only provide one-off funding for what has to be assumed to be an ongoing requirement. Secondly the Authority’s balances, as represented by reserves and provisions, are inadequate. The position is set out in some detail in paragraphs 15-22 of the submission. The external auditor has now published his opinion on the accounts for 2001/02 and this confirms that he has qualified the Authority’s accounts for the second year because of inadequate provisions for third party claims and pension liabilities. In his annual audit letter, to be considered by the Audit Panel on 9 December, he states that the Authority’s financial position ‘remains fragile and will continue to require close monitoring, with working balances still only the equivalent of five days net expenditure’.

d. Identify further savings. In the absence of further funding from grant, precept or reserves the Authority would have to find savings sufficient to balance the budget. There may be some limited opportunities, for example in relation to police overtime and the non-pay inflation provision (see paragraphs 16-23 below). However if there remained a significant requirement the Authority would have to reconsider areas where it has explicitly sought to avoid reductions, eg civil staff pay. Meantime, the MPS continues its search for savings so other suggestions might conceivably arise.

Scenario B: Grant is more than estimated (by an amount in excess of the funding gap)

10. If the grant projections following the settlement improve by more than enough to eliminate the funding gap the Authority could consider a range of options as follows:

a. New initiatives totalling £10.5m, that have been deferred previously, could be reconsidered for inclusion in the budget (see paragraphs 13-14 below).

b. Reinstatement of savings would be possible if there were any considered undesirable or doubtful of being delivered. A full list of the approved savings is set out in schedule 3.12 of the budget submission.

c. The precept requirement could be reduced. Certain items of growth have been included in the budget submission on the basis that they will be met by the precept funding envelope. Paragraphs 30 to 32 of the budget submission sets out these items in detail. The cost of some or all of these additional items could be transferred from precept to grant funding

d. Money could be added to balances to address the accounts qualification referred to in paragraph 9(c) above. In light of the potential size of the precept increase and the pressures on the service to respond to issues such as the Climbie Inquiry, and the significant investment required to simply bring the estate, IS/IT systems and other infrastructure up to modern standards, this option is considered to be a lesser priority for budget provision.

11. In practice of course options could be combined provided that the net result balanced the budget. Thus even if the grant settlement still left a funding gap new initiatives could be agreed provided sufficient savings were identified to fund both them and the funding gap.

Outstanding issues

12. There are a number of issues which have been identified for further consideration which could be relevant to resolving the final budget position depending on the outcome of the grant settlement.

New initiatives

13. The Authority has previously considered a list of potential new initiatives totalling £11.3 million but, with two exceptions, decided to defer decisions about their inclusion in the budget until after the announcement of the grant settlement when they could be assessed for affordability. The two exceptions are the extension from one to three rape havens and the appointment of the MPA deputy clerk and additional policy officer. The remaining proposed new initiatives are listed below and detailed supporting information is reproduced at Appendix B.

14. Members will be aware that there is ongoing work in the development of joint working with the CPS in response to the Glidewell proposals. There is general agreement around the need for balanced funding solutions, but there are still strategic issues to be addressed by the MPA that may mean a change in the make up of the existing costed plan. It is therefore proposed that, for the purposes of the budget, the new initiative cost of £2.4m is regarded as a provisional estimate of likely additional costs until further clarification is available.

Police Community Support Officers (PCSOs)

15. Apart from assuming continuing grant funding for the 500 police community support officers being recruited in the current year, the draft budget makes no provision for further growth in PCSOs. It is expected that further grant funding for PCSOs will be included in the grant settlement in which case an increase in PCSO numbers can be considered in that context. The Mayor has indicated that PCSOs could contribute to his objective for more visible policing in conjunction with additional police officers.

Police overtime

16. At the Finance Committee Members asked for an analysis of the net increase shown in the overtime budget between 2002/03 and 2003/04. This is set out below.

17. The pay reform package agreed by PNB includes a requirement to reduce overtime expenditure nationally by 15% over the next three years. At this stage a saving of £2.5 million has been included against the police overtime budget for 2003/04. The Finance Committee considered that this was a minimum figure pending clarification of the PNB requirement as it related to the MPS.

18. Under the PNB arrangements overtime target reductions are to be agreed between the Commissioner and the Authority, with the approval of HMIC. The baseline against which reductions are assessed and measured is 2001/02 actual overtime expenditure excluding payments for rostered shift working on public holidays and overtime payments to officers on secondment. The target reduction should normally be 15% by March 2006 but may be reduced to 10% where the Inspectorate is satisfied that effective action has been taken between 2000/01 and 2002/03 to reduce the overtime bill.

19. Work is still proceeding within the MPS to gather the information necessary to assess the PNB requirement. A report is being prepared for the next Finance Committee in January 2003, and Human Resources Committee in early February 2003.

Non-pay inflation provision

20. The Finance Committee agreed that the non-pay inflation provision should be reviewed following the grant settlement. The draft budget has built in an assumption of 2.5% for price increases. The underlying rate of inflation (RPI excluding mortgage interest payments) has been running between 1.5% and 2.5% over the last twelve months with an average of about 2%.

21. The Chancellor of the Exchequer’s Pre-budget Report forecast inflation to be 2.25% in the calendar year 2003, rising to 2.5% in 2004. There is no clear evidence that the inflationary impact on the MPS is significantly different to the economy generally.

External Consultancy

22. The Finance Committee agreed that an examination of possible further savings in the use of external consultants should be carried out as part of any exercise necessary to identify further savings.

23. Members are reminded that the draft budget already includes reductions of £0.9 million against a total external consultancy budget of £7 million. If the Authority decide that, in the light of the grant settlement, further savings are required to balance the budget, this area of expenditure would be reviewed along with other items dependent upon the level of savings required.

C. Equality and diversity implications

There are no new equality issues in relation to the final consideration of the budget for 2003/04.

D. Financial implications

The budget still represents work in progress on which the Mayor can consult. It has to be properly balanced before it is finally approved in early 2003. This intention will be to move towards a balanced budget as quickly as possible following the grant settlement but, given the Mayor’s consultation timetable, the consultation may have to recognise that the budget funding gap has not yet been fully closed.

E. Background papers

• MPA/MPS Budget Files

F. Contact details

Report author: Peter Martin, MPA.

For more information contact:

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

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