2004/05 budget – supplementary report

Report: 8a
Date: 9 December 2003
By: Treasurer and Commissioner

Summary

This report addresses the issues raised in the Mayor’s letter of 27 November 2003 circulated with the main report. Proposals are identified which will reduce the 2004/05 precept by £11 million. The report also presents the Prudential Indicators for approval by the MPA. The Treasurer’s report on the robustness of the estimates is attached.

A. Recommendations

That

1. the MPA responds to the Mayor’s letter of 27 November to the effect that it can reduce the 2004/05 budget requirement by a further £11 million and the Mayor and the Authority should make strong representations that the MPA’s budget should not be subject to capping.
2. the Authority approves the prudential indicators for submission to the Mayor; and
3. members note the advice of the Treasurer on the robustness of the estimates.

B. Supporting information

Introduction

1. The report on the 2004/05 Budget circulated with the agenda for this meeting included at Appendix C is a letter from the Mayor proposing a budget requirement for the MPA for 2004/05 of £2,334.3 million. This would require a further reduction of £23.9 million below the draft budget submitted to the Mayor as amended to reflect the provisional grant settlement and revised costs for the Step Change programme (SCP).

2. The Mayor’s letter identifies four areas where it is suggested that the reductions could be made. The following paragraphs consider each area in turn and assess the scope for any further change at this stage.

Income

3. The Mayor’s letter proposes that the income budget should be increased in line with the current year forecast. The final budget submission to the Mayor included an income budget of £315.9m (excluding partnerships) and contained additional income of £10.6m identified as part of the budget savings exercise. The current year budget forecast (as at September) includes income of £311.5m (including some one-off items) – and thus even after allowing for inflation, the income budget for 2004/05 is already at the same level as the forecast for the current year.

4. This request has therefore already been complied with and it would involve considerable risk to assume that we could generate a further £5m increase in the income budget in this way. However, a further review of income has recently been carried out and this has identified the possibility of additional net income of £1m being generated from the forfeiture of assets in 2004/05 and is thus recommended for inclusion in the budget as a further saving.

Committed increases

5. The Mayor has identified four committed growth items from the budget submission to be deferred as follows:

Extensions to Estate Portfolio (£6.3m)

6. This item comprises two main elements, the full-year cost of premises already contractually committed (£2.6m) and the urgent need to provide extra space to accommodate the existing growth in police officer and police staff (including PCSO) numbers that is occurring (and is thus committed) during this financial year (£4.7m).

7. In parallel with these two elements, the opportunity is being taken to maximise space efficiency across the MPS, in line with “Building Towards the Safest City – a property and estates strategy”, by the acquisition of new space (taking full advantage of the current weak commercial markets) and the surrender/sale of existing space and assets. This will enable us to accommodate the staffing growth that is already in the pipeline and to exit, at best value, current assets that are increasingly a liability.

8. Failure to execute this plan will mean the existing growth in numbers of police officers and police staff will not be able to be accommodated. The resulting over-occupancy at NSY and other Central London buildings would mean that the MPS would potentially be in breach of health and safety and other legal obligations. It will also result in higher revenue expenditure on existing assets (that is not presently provided in the budget), and in the case of one building, require significant unbudgeted capital expenditure to carry out essential health and safety and works, to maintain maximum occupancy.

9. The cost of retaining poor utilisation buildings and leaseholds is high and the MPA supports the need to break this cycle. Exploiting market conditions is key to execution of this strategy. Deferral would place this approach at high risk and miss an opportunity to deliver major financial benefits in the medium to longer term.

Support to Covert and Overt Operations (£1.5m)

10 This item reflects the increasing demands for technical operational support to frontline policing arising from the increasing size and technological requirements of the organisation. eg in support of Child Protection Teams, counter terrorism work etc. It is complemented by £250k of one-off expenditure to be met from the managed underspend this year, which it is proposed should continue. SMT proposes that this item should also be funded from underspend in the current financial year since any deferral would have a detrimental impact on delivery of performance improvements that would be achievable through the use of emerging technologies.

Burglary Sole Response (£1.4m)

11. Implementation of Burglary Sole Response will enable the Directorate of Forensic Services to make a step change in the response to victims of crime and also underpins the achievement of crime reduction targets for burglary. It is based on a model that provides borough-based staff managed in groups to provide the capacity to deliver a 24/7 response. In anticipation of this change the existing pool of forensic practitioners have already been moved onto shift working, funded from a successful growth bid in the 2003/04 budget. Work has also been carried out to expand the skills set of forensic staff to meet the requirements of a sole response role. The item is therefore already committed.

12. Continued funding from the Home Office for the DNA Expansion Programme may in future be linked to performance, in particular to the number of interventions in burglary and autocrime, which will only be possible with these additional resources if we are to maintain existing performance levels in other areas of forensic support.

13. Given the change in working methods and other developments under way it is considered essential to capitalise on the potential improvements to be gained from implementing this item in full.

Modernising Operations (£1.3m)

14. This is an integral part of the revised integrated borough operations function to support the delivery of the C3i Programme. There is a need to pick up the residual functions left on Boroughs after the centralisation of control rooms into the three C3i centres and it will be vital to ensure that structures are in place in accordance with the C3i timetable. Deferral of this item is not possible without jeopardising the whole C3i project timetable –which is unacceptable.

Overtime

15. The Mayor has requested a reduction of £3.5m in the police overtime budget in line with the original PNB agreement to produce a 15% reduction amounting to £10.5m over a three year period. Members of the Finance Committee will be aware from a detailed report to the last meeting on 20 November that a number of issues have arisen in relation to police overtime expenditure in the current financial year, and that the £2.5m reduction agreed for 2003/04 is unlikely to be achieved.

16. Detailed guidance on the management of overtime has been issued to all Units and the projected overspend of £5m for this financial year has recently reduced to £3.5m (as well as the average amount paid per officer). SMT consider that a saving of £2.5m (in line with this years target) could now be included in the budget for 2004/05 and that the Home Office should be approached to seek a variation to the initial agreement to phase the overall reduction over a slightly longer period. In addition SMT will also seek to gain exemption to the costs of major state and VIP visits to London from the revised PNB calculation.

New initiatives

17. The Mayor has also suggested that new initiatives to the value of £5m (other than those funded by balances) should be deferred as follows:

Information Management Business Change Programme (FoIA Compliance) (£1.6m)

18. This programme is to ensure improvements in the management of information within the MPS to ensure compliance with the Freedom of Information Act, which comes into full effect in January 2005. There will be a statutory requirement to respond to requests for information from the public within prescribed time limits.

19. A further review of these costs has recently been carried out and a reduction of £0.5m may be possible. It is therefore proposed that £0.5m be funded from the projected 2003/04 managed underspend to allow a buffer in case the budget has been too sharply reduced The balance of funding is considered essential if resources are not to be diverted from operational functions in order to deal with the demands of the new legislation.

War Crimes Unit (£1.1m)

20. This item was included to recognise the increasing number of war crimes which the MPS is requested to investigate, and comprised seven additional staff plus overseas travel costs. SMT propose that this item should be deleted and the Home office be requested to fund any increase above current activity levels or alternatively one-off funds will need to be identified from reserves, when required, if such requests are not approved. Subject to the current projected underspend for 2003/04 being sustained, SMT recommend that an earmarked reserve is established at year end to do this while negotiations continue with the Home Office on funding.

Leadership Programme (£0.8m)

21. This item is a leadership development programme for sergeants, inspectors and police staff delivered by TP (in conjunction with the Diversity Unit) to all these ranks/staff bands across all Territorial Policing Units. Although the Commissioner considers it critical to extend the number of staff benefiting from the programme, in view of the potential clash in 2004/05 with abstractions relating to C3i training, the SMT now propose that this programme should be phased over a slightly longer time period and that around 50% of the costs (£0.4m) in 2004/05 should be deleted.

Mobile Data Terminals (£0.5m)

22. The key objective of this project is to provide patrolling MPS officers with access to IT Systems whilst mobile or on foot. It is seen as providing a step change in performance and productivity and also addresses one of the key recommendations of the Stephen Lawrence Inquiry to provide hand-held devices to record stop encounters. Several pilot projects in boroughs have already commenced.

23. This item comprises the revenue costs of staff and running costs, which are required to facilitate the operation of the terminals, the purchase of which is already included in the Capital Programme.

Cell Accommodation Project (£0.5m)

24. This is a new project to review all aspects of cell accommodation across the MPS and is led by TP HQ. Current accommodation is often in need of significant modernisation and is also unable to meet increasing demand, and often results in prisoners needing to be transported long distances across London or to cells in neighbouring force areas.

25. This revenue growth bid complements monies already included within the Capital Programme for refurbishing some mothballed cells but will also examine more innovative building solutions and management systems.

People Development (£0.5m)

26. This initiative comprises three elements:

• Career development – to improve professionalism and performance
• Occupational health – to expand proactive occupational health measures to reduce the number of days lost to preventable illness and injury (expanding the existing spend to save programme)
• Health and Safety – to heighten health and safety awareness across the MPS by refreshing training programmes, ensuring the estate complies with relevant legislation and promoting the use of risk assessments.

27. All these measures are aimed at helping to achieve the Mayor’s goals of developing and maintaining a professional and diverse workforce geared towards improving operational performance, and to ensure compliance with Home Office guidelines and statutory responsibilities, such as health and safety legislation.

Monitoring of Corporate Performance Priorities (£0.2m)

28. This item provides for additional staff to provide support for technical design of performance management reports, for rollout and management of MetMIS, and for performance analysis for the National Intelligence Model corporate strategic assessment process.

29. The GLA have recently drawn attention to the need for the MPA/MPS to improve its performance management information and to the introduction of new performance measures to provide better indications of views of Londoners of the police service and issues such as safety and security.

Summary of change proposals

30. The following table summarises the further savings/reductions in expenditure agreed by the Commissioners SMT in response to the Mayor’s request. It includes a commitment to seek a further £1 million savings yet to be identified.

31 Proposed to be met from the current year’s underspending. The latest (October) budget forecast for 2003/04, to be reported to the next meeting of the Finance Committee, indicates an underspend of £5.8m (after the transfer of £12.8m to reserves to support next year’s budget strategy).

Other options

32. The Mayor’s letter implies that the Authority should consider other options if the full reduction cannot be secured from the headings identified and considered above. The remaining elements of the budget are reviewed in turn in the following paragraphs.

Inflation provision

33. The pay inflation assumption has already been tightened to 3%. The price inflation will have to accommodate potentially exceptional price increases arising from the re-tendering of outsourced contracts. Any further reduction in this area would run the risk that this provision would be inadequate to meet obligatory increases both on pay and prices.

Efficiency and other savings

34. The budget already reflects savings of £56.8 million, making a cumulative four year savings total of £161 million. Apart from the issue of overtime considered above, and the final review of income, the Authority accepted in approving the budget submission that significant further savings could not be made without adverse impacts on operational effectiveness. This position is unchanged.

Pensions

35 The necessary funding for police pensions was reviewed in October and reported to the Finance Committee and the Authority. Nothing has changed since that review.

Step Change Programme

36. Step Change, at a cost next year of £26.6 million, is the only major uncommitted item in the budget. The reduction of £24 million being sought by the Mayor could be achieved at a stroke if the implementation of Step Change was deferred until 2005/06.

Grants

37. Although there are indications at ministerial level that the Home Office is seeking a solution to the Airwave grant problem there is no new information at the time of writing this report on this or any other outstanding issues in relation to grant.

Reserves

38. Reserves are already being used to support the budget, sourced either from managed underspendings in the current year or from surplus requirements identified as a result of a comprehensive review of reserves and balances. All reserves are earmarked to meet spending requirements and demands which would otherwise put further pressure on the budget. The general reserve to meet unforeseen and emergency expenditure is at its minimum acceptable 1% level.

39. The external auditor is about to publish his annual audit letter a draft of which has been presented to the Audit Panel. In speaking to the Panel he urged that the Authority should not lose ground that has been made up in its financial standing. Within the letter he makes the following comments:

• ‘The difficulties experienced in controlling the budget make it more essential, than would be the case in organisations with more effective budgetary control systems, to maintain an adequate level of general reserves.’
• ‘The Authority must take action to ensure that future plans and budgets allow for further contributions to be made to the general reserve where possible, as the 1% …. that the Treasurer has recommended and achieved is only the minimum level he deems appropriate. We concur with this view.’

40. The Treasurer’s advice is that there is no further scope for utilising existing reserves in the context of the 2004/05 budget. However the latest forecast outturn suggests that there is scope to increase the ‘managed underspend’ reserve to fund expenditure next year which would otherwise fall on the precept. On the latest forecast a further £5.8 million could be added. This would be broadly sufficient to meet the request from the MPS Management Team in paragraph 8 above and to create a further £3 million funding.

41. There is clearly a risk in assuming that forecast underspendings will actually be delivered. The position will have to be reviewed in the light of the actual outturn. If there is a shortfall, so that the projected funding from reserves cannot be achieved, the budget will have to be adjusted accordingly.

42. It will be necessary to identify specific items of expenditure to be financed from this source. They would have to be one-off in nature because there could be no presumption of future funding until the 2005/06 budget is set.

Response to the Mayor

43. The review of the potential areas for budget reduction identified in the Mayor’s letter and other options produces a level of reduction which could be supported of £11 million, ie £8 million as identified by the MPS plus further funding of £3 million from reserved underspendings. The only other option available to meet the level of reduction sought by the Mayor would be to defer Step Change.

44. The response should also include the proposal that the Mayor and the Authority should make strong representations that the MPA’s budget should not be subject to capping in view of the arguments set out in paragraphs 63-72 of the main report.

45. In considering the request from the Mayor to approve further budget reductions totalling £24m, the Authority are reminded that the budget submission already meets Option 3 of the guidance, (£42.6m of implied savings) and delivered £26.8m of the further £44.8m savings needed to comply with Option 2. Indeed if the Mayors current suggestions of a further £24m reductions were approved, this would take the budget requirement down to some £6m below the original Option 2 level in the guidance.

46. The budget will be amended as follows to reflect the changes proposed in this report.

47. Specific earmarked reserves will be created out of the 2003/04 underspending for these items, which will remain on the balance sheet for if and when they are required.

48. The resulting overall budget position can be summarised as follows.

Prudential indicators

49. The main report explains the purpose of, and process for, the implementation of the prudential system for local authority capital finance. Appendix A sets out the prudential indicators for approval by the Authority. The indicators will be subject to review before the start of the next financial year.

Robustness of the estimates

50. The Local Government Act 2003 placed a new duty on the Treasurer, as the statutory chief finance officer, to report on the robustness of the estimates. This report is attached at the Appendix B.

C. Equality and diversity implications

The equality and diversity implications of the budget have been covered in the budget submission.

D. Financial implications

These are spelt out in the report.

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

Appendix A

Prudential indicators for the Metropolitan Police Authority

Affordability indicators

1. Estimate of capital financing costs compared to net revenue stream.

Ratio of financing costs to net revenue stream

The estimates of financing costs include the proposals in the budget report, 2004/05 capital starts for the Step Change Programme and show external interest net of investment income. The indicators have not assumed any decisions on proposals from the present report.

This indicator compares the total principal and net interest payments on external debt to the overall revenue spending of the authority. The Authority’s external borrowing is considered low comparatively to other authorities and there is a high level of investment income, but this indicator is still important because if the level of borrowing were to increase significantly an important factor in determining the existing and future levels of debt is the level of financial support from government. The continuation of government support to existing debt commitments is therefore crucial in understanding the affordability, prudence and sustainability of its borrowing. At present the arrangements for this support have not been finalised but it is anticipated that similar support as at present will occur.

2. Estimated Incremental impact of capital investment decisions on the council tax.

Estimated incremental impact of capital investment decisions on Band D council tax

Detailed guidance has not yet been issued on how to calculate this indicator. A methodology has been developed which identifies the cost of unsupported borrowing including costs of revenue effects of the 2004/05 capital starts for the Step Change programme. The council tax costs reflect debt charges on unsupported borrowing, loss of interest on capital receipts used to finance new investment decisions, debt charges on new investment reflecting the proportion of precept to budget requirement (reflecting the general non government grant supported spending).

Prudence indicator

3. Net borrowing and the capital financing requirement.

CIPFA’s Prudential Code includes the following as a key indicator of prudence:

“In order to ensure that over the medium term net borrowing will only be for a capital purpose, the authority should ensure that net external borrowing does not, except in the short term, exceed the total of Capital Financing Requirement in the preceding year plus the estimates of any additional Capital Financing requirement for the current and next two financial years”

Net borrowing and the capital financing requirement

The Treasurer reports that the authority had no difficulty meeting this requirement in 2002/3, nor are there any difficulties envisaged for the current or future years. This view takes into account current commitments, existing plans, and the proposals in this budget report.

Capital expenditure indicators

4. Capital Expenditure

Capital Expenditure

This indicator states the total capital spend covering all capital expenditure and not just that financed by borrowing.

5. Capital financing requirement.

Capital financing requirement

The capital financing requirement measures the authority’s underlying need to borrow for a capital purpose. The Authority does not associate borrowing with particular items or types of expenditure. The authority has an integrated treasury management strategy and has adopted the CIPFA Code of Practice for Treasury Management in the Public Services. The authority has at any point in time, a number of cashflows (both positive and negative) and manages its treasury position in terms of its borrowings and investments in accordance with its approved treasury management strategy. In day-to-day cash management, no distinction can be made between revenue cash and capital cash. External borrowing arises as a consequence of all the financial transactions of the authority and not simply those arising from capital spending. In contrast, the Capital Financing Requirement reflects the authority’s underlying need to borrow for a capital purpose.

External debt indicators

6. Authorised Limit for External Debt

Authorised Limit for External Debt

This is the maximum amount that the authority allows itself to borrow in each year. The Treasurer reports that these Authorised Limits are consistent with the authority’s current commitments, existing plans and the proposals in the budget report for capital expenditure and financing, and with its approved treasury management policy statement and practices. They are based on the estimate of the most likely, prudent but not worst-case scenario, with in addition sufficient headroom over and above this to allow for operational management, for example unusual cash movements. Risk analysis and risk management strategies have been taken into account, as have plans for capital expenditure and estimates of cashflow requirements.

7. Operational Boundary for External Debt.

Operational boundary for external debt

The proposed Operational Boundary for external debt is based on the same estimates as the Authorised Limit but reflects directly the estimate of the most likely, prudent, but not worst case scenario, without the additional headroom included within the Authorised Limit to allow for example for unusual cash movements and equates to the maximum of external debt projected by this estimate.

8. Actual External Debt

Actual external debt

Treasury management indicators

9. Net Outstanding Principal – Limits in interest rate exposure.

Limits in interest rate exposure calculated with reference to net outstanding principal sums

This indicator reflects the requirement specified under the Code, however the outstanding principal payable and receivable from external loans and investments is exceedingly weighted towards investment: £125.3 million external borrowing and £306.64 million investment in 2002/03. Both of these balances will gradually reduce, to about £90 million and £250 million respectively by 2005/06. It is therefore proposed that for operational treasury management purposes two discretionary indicators are approved as follows:

10. Gross Outstanding Borrowing.

Limits in interest rate exposure calculated with reference to net outstanding borrowing sums

11. Gross Outstanding Investment.

Limits in interest rate exposure calculated with reference to outstanding investment sums

12. Maturity Structure of Borrowing – Upper and Lower Limits

Amount of projected borrowing that is fixed rate maturing in each period as a percentage of total projected borrowing that is fixed rate

13. Principal sums invested for periods longer than 364 days.

There are currently no proposals for the authority to invest sums for longer than 364 days. However, the authority may wish to consider some limited longer-term investment in future years and a ceiling of £30 million is proposed

14. The MPA has adopted the CIPFA Code of Practice for Treasury Management in Public Services.

Appendix B

Report on robustness of the estimates

Reliability/accuracy

1. The estimates have been put together by, or with the involvement of, qualified finance staff and reviewed by the Corporate Finance section of the MPS Finance Services Department.

Scrutiny

2. Budget proposals have been through a rigorous scrutiny within the MPS. The Finance Committee has received reports on the budget at six meetings between June and November 2003. The informal Budget Group has also met once to look specifically at budget proposals. The budget submission was approved by the full Authority. In addition there has been a regular dialogue with, and challenge from the Mayor and GLA officers.

Achievability and risks

3. There are areas of risk in the budget. The achievement of £56.8 million savings will require positive management. Some budgets, eg police overtime, carry a significant risk of overspending. However, whilst budgetary control has to improve further, the MPS has demonstrated its ability to manage down a potential overspending.

4. There is a risk that the projected underspending in 2003/04 will not materialise resulting in a shortfall in the budget funding. In that event the budget will have to reviewed and adjusted accordingly.

5. Furthermore financial risks are further mitigated by the Authority’s insurance arrangements and by the existence of appropriate reserves.

6. The Authority takes a prudent approach to achievability of income and debts due, making appropriate provisions for bad debts.

7. The Authority has adopted accruals accounting, in particular making full provision for realistic estimates of future settlements of known liabilities. In particular this has assisted the budget process by ensuring sound ‘reality-checking’ of previous year actual expenditure against proposed estimates.

8. The level of external borrowing is low and therefore the Authority’s degree of financial exposure to interest rate changes is low.

9. The Authority has recognised the risks associated with the major programme of outsourcing and has introduced a programme to manage these risks.

10. The MPS has created a new post of Director of Risk Management which allows pro-active assessment of risks within the MPS.

Future commitments

11. As is demonstrated in the main report the financial projections for future years show substantial growth. This will need to be carefully reviewed over the next year in the light of likely grant and precept resources. As recommended in the main report no commitment can be given to future years’ Step Change costs without further review.

12. The Authority’s cash flow requirements are forecast and monitored on a monthly basis to ensure stable and predictable treasury management, avoiding unexpected financing requirements.

Capital

13. The risk inherent in large capital schemes is considered low. The major capital scheme is the C3i project. Risks around the project have been minimised by a rigorous governance arrangement incorporating external validation. The C3i project is substantially supported by government grant thereby minimising risks around available finance.

14. The new Prudential Code has introduced a rigorous system of prudential indicators, which explicitly require regard to affordability, prudence, value for money, stewardship, service objectives and practicality. This is backed up by a specific requirement to monitor performance against forward-looking indicators and report and act on significant deviations.

Conclusion

The estimates have been prepared in a properly controlled and professionally supported process. They have been subject to due consideration within the MPS and by the MPA. The identifiable risks should be capable of management. Due caution should be exercised in making future commitments.

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