2005/06 budget submission

Report: 7
Date: 28 October 2004
By: Treasurer and Commissioner

Summary

The Authority is asked to approve the 2005/06 budget submission to be delivered to the Mayor by 8 November. The submission comprises six sections including the 2005/06 draft budget itself. The projected precept increase, especially if further Step Change growth is incorporated, is probably unsustainable in the context of council tax capping. The budget will be reviewed following the provisional grant settlement and in the meantime work will continue to identify options for reducing the budget. The Authority will make final decisions on the budget submission to the Mayor at its meeting on 7 December 2004.

A. Recommendation

Members are asked to

1. Confirm the MPA’s direct budget (paragraph 5 and Appendix A)
2. Endorse the approach underlying Step Change option D (paragraphs 6-8)
3. Approve the 2005/06 budget submission subject to review in December
4. Require continuing work to identify options for reducing the budget so that they are available for consideration following the announcement of the grant settlement (paragraph 12)
5. Note the provisional advice on the robustness of the estimates (Appendix B).

B. Supporting information

Introduction

1. The 2005/06 budget submission has to be delivered to the Mayor by 8 November 2004 and is before the Authority for approval at this meeting.

2. The submission has been developed in accordance with the Mayor’s guidance and comprises six sections:

• Business Plan (section A). Reviewed by the Chair of Planning Performance and Review Committee.
• 2005/06 Revenue Budget and Medium Term Financial Projection (section B). Considered in draft by the Finance Committee on 11 October 2004.
• Step Change Programme Business Case (section C). Considered in draft by the Finance Committee.
• Borrowing and Capital Spending Plan 2005/06 to 2009/10 (section D). Considered in draft by the Finance Committee.
• Budget and Equalities (section E). The MPA submission (E1) has been reviewed by the Chair of Equal Opportunities and Diversity Board. The MPS submission (E2) has not been formally considered by members.
• Budget and Environment (section F). Considered in draft by the Finance Committee.

3. In approving the submission the Authority will be endorsing all its components. This covering report particularly highlights key issues in relation to the 2005/06 revenue budget.

MPA budget

4. The bulk of the budget is delegated to the Commissioner to manage on a day-to-day basis. However a small element is retained for direct management by the MPA in respect of its own support organisation, community consultation and independent corporate functions such as audit.

5. The Coordination and Policing Committee considered the draft MPA budget at its meeting on 8 October. A copy of the report is attached at Appendix A. The Committee supported the inclusion of additional proposals totalling £221,000 which are described in paragraph 9 of the committee report. In addition the Committee endorsed the Chair’s proposal to make a ring-fenced provision of £100,000 to facilitate capacity building in the MPA. These recommendations are subject to the approval of the full Authority at this meeting in the light of the overall budget submission. If approved these sums will be incorporated into the draft budget before it is submitted to the Mayor.

Step Change programme

6. The business case at section C of the submission supports the continued implementation of the Step Change programme. The Finance Committee reviewed options for 2005/06 and supported the need for a balanced approach with growth in Specialist Crime and Special Operations in parallel with the extension of Safer Neighbourhoods. A revised option (option D in the business case) has been produced reflecting this approach but seeking to limit the cost. Nevertheless the cost in 2005/06 is still substantial at £39.4 million.

7. The Step Change costs are largely driven by the assumption that five new neighbourhood teams per borough are in place from the beginning of 2005/06. This would build on additional government funding expected in the current year to facilitate recruitment of PCSOs during January-March 2005. However to achieve this, commitments will need to be made before the final budget approval in February and there would be additional costs in 2004/05 which the Authority would have to be able to accommodate. Implementation of the new neighbourhood teams will therefore have to be considered by the Authority at its meeting on 7 December following the grant settlement and with clear guidance from the Mayor in relation to next year’s budget.

8. Members are asked if they wish to endorse the approach underlying option D. The option has been used in the revenue budget submission and in the following paragraphs to exemplify the overall budget implications.

Overall 2005/06 revenue budget

9. The detailed description and analysis of the 2005/06 revenue budget is set out in section B of the submission. In accordance with the Mayor’s guidance the budget has been developed initially excluding any new Step Change growth. On this basis the budget as drafted falls within the range set by the Mayor for exemplifying budget options. It is broadly in line with one of the intermediate options agreed by the Finance Committee to produce a precept increase below 10%.

10. The draft budget for 2005/06 reflects net expenditure of £2,703.1 million, a 5.3% increase over 2004/05. The following table summarises the variation between the two years.

11. The increase is substantially accounted for by inflation and commitments, including pensions increases, offset by savings totalling nearly £66 million. New initiatives represent only 0.7% of the increase. Details of the variations are set out in the schedules to section B of the submission. A number of potential expenditure increases have been excluded as part of the budget process and a separate briefing has been provided to Authority members.

12. The following table summarises the draft budget before and after inclusion of Step Change growth in accordance with option D.

13. The estimates of grant entitlement are based on assumptions at this stage. The provisional grant settlement is expected to be announced mid November at which stage firmer grant figures should be available and the budget position will have to be reviewed.

14. The proposed use of reserves in 2005/06 is explained in paragraphs 54 of the revenue budget submission and relates to the application of the pensions reserve in accordance with its objective of smoothing the impact of growth in the number of police officers retiring.

15. The Finance Committee was particularly conscious of the need to constrain the precept increase especially in the context of potential council tax capping. Given that the budget will be reviewed following the grant settlement the Committee accepted that setting a further target for reducing the budget beforehand would not be helpful. However the Committee was strongly of the view that work must continue to identify options for budget reduction that can be brought forward at short notice after the grant settlement. The Authority is asked to endorse this view.

16. The budget guidance requires the Treasurer to produce a report on the robustness of the estimates and this is attached at Appendix B. This advice can only be provisional pending the further review of the budget following the grant settlement.

17. Following approval of the submission to be made to the Mayor by 8 November the Authority will reconsider the budget at its meeting on 7 December in the light of the grant settlement and further dialogue with the Mayor.

C. Race and equality impact

Equalities issues in relation to the budget are specifically addressed in the Equalities and Budget submission. Individual expenditure and savings proposals will be assessed for any diversity implications.

D. Financial implications

The budget provides the approval for expenditure in 2005/06 and the basis for budgetary control during the year.

E. Background papers

• MPA/MPS 2005/06 budget files

F. Contact details

Report author: Peter Martin

For more information contact:

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

Appendix B: Report on robustness of the estimates

This report addresses the estimates as incorporated in the draft 2005/06 budget to be approved by the MPA on 28 October before submission to the Mayor. The submission will be subject to further review after the publication of the provisional grant settlement, expected mid November, and this advice on the robustness of the estimates will be revised appropriately following that review.

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. I have asked a series of questions about the construction of the budget and the nature of individual components and have received responses from the MPS. The Finance Committee has reviewed the draft submission. The budget submission will be approved by the full Authority. In addition there has been a regular dialogue with, and challenge from the Mayor and GLA officers. Further amendments to the budget before final submission to the Mayor in December will also be subject to scrutiny from officers and members.

Achievability and risks

3. There are a number of areas of risk in the budget as currently proposed. In particular the budget is being submitted initially before the government grant settlement. Assumptions have therefore had to be made to estimate the MPA’s grant entitlement. The current estimates will be replaced by relatively firm grant figures following the settlement. At this stage there is a definite risk that the grant estimates are overstated.

4. In 2004/05 the Government took steps to cap council tax increases considered excessive. This included the nomination of three police authorities. It is likely that capping will apply again in 2005/06. In our case capping would actually apply to the overall GLA precept. However since the police component represents approximately 80% of the GLA precept, the increase in the MPA precept will be critical in relation to the criteria for excessiveness applied to the overall precept and a significant impact would inevitably fall on the MPA budget if the GLA precept had to be reduced as a result of capping. There is no firm information at the moment as to the criteria that will be applied in 2005/06. However on the basis of the criteria set for 2004/05 and ministerial pronouncements it is very probable that the budget to be submitted at this stage, including provision for further Step Change growth, will exceed the capping criteria for 2005/06 and will therefore have to be reduced before final approval by the GLA.

5. The draft budget requires delivery of savings totalling £65.8 million. This is a higher figure than has actually been achieved in any of the last four budgets. However it includes some measures which require no management action within the service, eg capitalisation of expenditure, and also substantial sums of additional income which are reasonably assured at this stage. Nevertheless there are significant items in the savings list which will require firm management and difficult decisions. Greater clarity is being sought as to how these savings will be achieved.

6. Monitoring of the 2004/05 budget shows overall expenditure close to budget. However business group budgets as a whole are predicted to overspend offset by underspendings on police pensions. Significant reductions are already reflected in respect of pensions in the draft budget for 2005/06, whilst some elements of the current overspending, particularly police overtime, have not been carried through into next year’s budget proposals. There is therefore a risk that overspendings will persist in 2005/06. Management action will be required to minimise this risk and to take appropriate corrective action if it does materialise during the year.

7. There are a number of features of the Authority’s financial policies, accounting policies and governance arrangements which mitigate financial risks. These include the following

• An element of the risk of financial loss is transferred externally though insurance arrangements.
• The Authority has appropriate general and earmarked reserves
• The Authority takes a prudent approach to achievability of income and debts due, making appropriate provisions for bad debts.
• The Authority has adopted accruals accounting, in particular making full provision for realistic estimates of future settlements of known liabilities.
• The level of external borrowing is low and therefore the Authority’s exposure to interest rate changes is low.
• The Authority has recognised the risks associated with the major programme of re-tendering outsourced contracts. There are appropriate management arrangements in place and financial provision has been made for associated one-off costs.
• Risk management has been built into the corporate governance arrangements of both the MPA and MPS so that there is proactive assessment of risks and processes to monitor and manage risks.

Future commitments

8. The financial projections for future years included in the budget show a significant level of ongoing commitment. However further work is required on the medium term figures in order to judge the implications in the context of the Authority’s overall financial position.

9. 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

10. 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.

11. 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.

12. The new capital strategy has drawn together for the first time key processes and arrangements for prioritisation, appraisal, management, monitoring and review of the existing programme and new investment. Although the processes are as yet immature, improvements will be made over the short to medium term which will inform choices on the allocation of additional capital investment and its affordability.

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 risks identified in this report will be subject to further review as the budget is amended before final submission to the Mayor in December.

Peter Martin
MPA Treasurer

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