Progress report on the budget submission 2006/07 – 2008/09

Report: 8
Date: 4 November 2005
By: Commissioner and Treasurer

Summary

This report provides an update on latest progress in the preparation of the draft Budget Submission to the Mayor for 2006/07.

A. Recommendations

Members are recommended to:

1. Note the further progress being made on the Budget submission to the Mayor for 2006/07 and the financial overview position as summarised in Appendix 1, in particular the requirement for continuing work to identify options for reducing the budget gap.
2. Note that a further report will be submitted to a meeting of the full Authority to be arranged on 17 November 2005
3. Confirm the MPA’s direct budget and proposals for transferring any year end underspend to reserves
4. Note the provisional advice on the robustness of the estimates (Appendix 2)

B. Supporting information

Background

1. A progress report on the preparation of the draft MTFP and revenue Budget Submission for 2006/07 – 2008/09 was submitted to the full Authority on 27 October 2005. An earlier detailed report to the joint PPRC/Finance Committee (10th October) had identified the main financial issues affecting the budget submission for 2006/07 including a number of spending pressures, proposals for budget savings, the latest government grant projection, and proposals for new initiatives/corporate priorities. A shorter update report was provided to the Finance Committee on 20 October.

2. The financial overview in the report on 10 October was of a budget deficit of £36m in 2006/07 after allowing for a precept increase of 5.5% and an increase in general Government Grant of 3.2%. This shortfall had been reduced to £20m by 27 October, and since then considerable work has been undertaken and this report updates the committee on progress to reduce the shortfall further.

Progress on Revenue Budget Submission

3. A series of budget scrutiny meetings have been held by the Chair of the MPA and a small group of MPA members comprising the two Vice Chairs, and Chairs of Finance and Policy, Performance and Review Committees. Individual MPS business groups and Management Board members were asked to present their detailed revenue growth and savings proposals for scrutiny by the members. A small number of changes to both proposed expenditure savings and growth have been made. A further review of the proposals has now taken place since the full Authority meeting, taking into account the views of MPS Investment Board (see below).

4. In addition the MPS Investment Board has held two meetings to further review the proposed growth and savings, and to particularly assess possible impacts of any savings across business groups as well as on strategic priorities. A small number of suggested savings which would have an adverse impact across various business groups have been proposed for withdrawal or reduction during this review process.

5. A full list of the latest proposals for growth items to be included within the budget submission is attached to the Exempt paper later in this agenda. These are categorised over the following broad areas.

1. Inflation: Including both the normal annual round of pay and price increases together with some exceptional increases such as energy prices.
2. Current programme commitments: This includes items such as the full year effect of Step Change Phase 2; Revenue effects of the capital programme; outsourced contracts transition costs; and increased costs of the C3i/Airwave programme as a result of delays arising from the NTL withdrawal.
3. Loss of funding sources/non-recurring savings: Items such as Central Operations (CO) tasking that was approved to be funded from reserves in 2005/06 but needs permanent budgetary provision; withdrawal of grant for the National Mobile Phone Crime Unit; and a temporary Directorate of Information (DoI) contract saving to fund the implementation of the Resource Allocation Formula (RAF) formula.
4. Budgets currently overspending: The budget forecast for the current financial year includes a number of budgets that have faced significant pressures and are forecast to overspend. The largest areas of overspend are in forensic and DNA analysis where demand for support has substantially increased in recent years.
5. Corporate priority growth : A small number of new initiatives have been included to address corporate priorities arising from the new Corporate Strategy or Service Review.

6. A full list of the latest proposals for budget savings is attached to the Exempt paper later on this agenda. The list also indicates the likely impact of the savings on police officer and police staff numbers –but this is before any growth arising from further rollout of Safer Neighbourhood Teams or the Counter Terrorism bid. If these two additional growth bids are approved then there will be a repositioning in the business and a shift of resources into new areas of capacity building. Additional police officer/police staff numbers in these areas will result in an overall increased redirection of resources.

7. The planned rollout of the Safer Neighbourhood Teams comprises 368 teams during 2006/07 – on top of 256 teams already in place – to make a total of 624 teams.

8. Funding for this proposal is currently being projected/negotiated from three sources: (i) Home Office; (ii) redirection of 500 beat officers in TP; and (iii) additional funding from the Mayor via Council Tax precept. Total estimated revenue costs and current estimates of funding are as follows:

9. Full rollout during 2006/07 would require an additional net increase of 650 police officers (after redirecting 500 Beat Officers) and an additional 1,100 PCSOs.

10. A review of one off growth items across all business groups has also been undertaken (which are one off in nature in 2006/07 only) and further items totalling £6.4m are now proposed to be funded ‘”one-off”’ from reserves.-(as well as £10.7m previously identified) i.e. the growth items would be removed from the 2007/08 budget. This gives a revised total of £17.1m to be funded from reserves. The level of reserves required in 2007/08 and going forward, will also need further consideration later in the budget cycle and in particular the possibility of replenishing reserves used to fund “one-off” growth above.

11. A further review of corporate budgets held in 2005/06 is currently being undertaken as part of the period 7 forecasting exercise. This may result in some reductions in the list of overspending budgets listed for 2006/07 (£26m) but further work is required to complete this exercise.

12. A meeting of the Home Office working group dealing with the proposed police officer pension funding changes planned for April 2006 has now taken place. The Home Office had originally indicated that a formula grant adjustment of approx. £90m would be required nationally –but the latest information would indicate a significantly larger adjustment will be required. All forces were recently requested to urgently provide updated forecasts of costs and pensioner numbers to the Home Office.

13. In relation to the use of revenue reserves, the funding of the additional costs of Operation Theseus continues to provide uncertainty to the budget process. An interim payment of £10m by the Home Office has now been received by the MPS, and whilst the projected future costs have reduced, the ongoing uncertainty around how much of the total costs the MPA/MPS will have to fund continues to make financial planning in relation to possible use of reserves very difficult. Indeed, the Treasurer has advised, at this stage, not to relax the restriction around the reserves at the present moment.

14. Preliminary discussions have taken place with the various MPS trade unions, Met Federation and Superintendents’ Staff Association to discuss the budget growth and savings proposals as well as the possible growth from further rollout of Safer Neighbourhood teams and Counter Terrorism bid. More detailed consultation will be required once proposals are more firm.

Summary

15. The overview position as set out in Appendix 1 shows that the revenue budget deficit on current grant and precept assumptions has now reduced to £16m in 2006/07. (compared to £20m as reported to full Authority).

16. This excludes the additional precept funding requirement of £31.8m for the Safer Neighbourhoods accelerated roll out of 368 teams in 2006/07. Further work is progressing to consider options for reducing this deficit- including further reviewing the budget forecast for 2005/06, the proposed growth and savings proposals and any central budget provisions which might be available. It is proposed to include the requirement for an additional £31.8m as a proposal for the Mayor to consider. The Safer Neighbourhoods Business case will be appended to the Revenue Budget Submission.

17. The Mayor’s Budget Guidance requires the MPA/MPS to submit a budget contained within a 5.5% precept increase –but it is a matter for the MPA to decide how it responds to the Mayor’s budget guidance. The table in Appendix 1 already assumes an increase of 5.5% and the current shortfall of £16m would require a further increase of 2.8% if it were to be all met by a precept increase.

18. As stated above, over £17m of one off growth proposals have been identified as being suitable for funding from reserves. At this stage no specific reserve has been identified, although in practice it might be assumed that this will be from the Budget Resilience Reserve which currently has a balance of £20.3m. However caution does need to be exercised in the use of reserves (see above) due to uncertainty around the Operation Theseus costs and other issues such as the changes to police pensions financing.

Next steps

19. The MPA overall Budget Submission for 2006/07 – 2008/09 is required to be submitted to the Mayor by 14 November 2005. It was originally anticipated that a draft of the narrative and specified schedules for inclusion in the submission would have been finalised at this point. However, given the uncertainties that are still evident, it has not been possible to reach that stage and work continues.

20. At this stage, it is unlikely that all elements of final submission for the Mayor will be able to be formally approved by committee prior to the deadline. Although the budget submission deadline is 14th November, it is proposed that an additional full Authority meeting be arranged for the afternoon of the 17th November, prior to the scheduled Finance Committee. It is proposed that the draft budget submission be provided to the GLA on 14 November but that it is provided subject to formal approval on 17 November.

21. The budget guidance requires the Treasurer to produce a report on the robustness of the estimates and this is attached at Appendix 2. This advice can only be provisional pending further review of the budget following the grant settlement.

22. Further work will be carried out in scrutinising growth bids and ongoing budgets as part of the move towards a “balanced budget submission”. Work is already underway on considering the impacts of spending decisions this year and investigating options for further reductions next year. Any changes identified will be reflected in the report to the next meeting.

MPA Secretariat Budget

23. 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 organisation, community consultation and independent corporate functions such as audit.

The 2005/06 budget for the MPA Secretariat currently stands at £9.913 million, encompassing the support organisation, audit and consultative groups, including independent custody visitors.

The approved 2005-06 budget has decreased from £9.913 million to the revised figure of £9.907 million, as shown below:

24. The budget will be revised again when the in-year allocation from centrally held budgets to cover pay awards is actioned.

25. Legal expenses – expenditure on securing external legal advice in relation to matters such as police pension tribunals and other matters has consistently run higher than the available budget. It is proposed that any underspending arising in 2005/06 (which could be up to £300,000) on the MPA Secretariat budget is transferred to reserves to be made available to finance legal costs.

Draft Secretariat budget 2006-07

26. In developing the draft budget for 2006-07, the MPA senior management team (SMT) and policy leads have considered the overall resources of the secretariat and internal audit, in the light of the Corporate Strategy, to identify whether existing resources are sitting in the right place and whether there is a case to be made for additional resources. The SMT were also mindful of the requirement for significant savings to be made by the MPS in the current budget preparation.

27. This consideration of the overall resources of the MPA Secretariat has led to the following redirection of resources:

• a vacant audit post has been redirected to the Planning and Performance team as an additional performance analyst post. The additional post will enable the team to respond to more ad-hoc requests for reports and continue the development of regular information bulletins;
• funds from the general IS/IT budget have been redirected to enable the creation of an additional systems support post, together with anticipated savings from redirection review, to be undertaken by the Deputy Chief Executive.

28. As in previous years an early allocation from the ‘inflation pot’ has been sought to cover the annual uplift in members allowances (based on the pay award agreed by the Police Support Staff Council of 3%) of approximately £7,000, and £25,000 to reflect the uplift in the pay element of the budget for Community and Police Consultative Groups. Members are asked to endorse the draft budget of £9.939 million.

C. Race and equality impact

There are no specific impacts arising from this progress report. A report on the diversity and equality implications of all revenue growth and savings budget proposals will be submitted to the MPA Equal Opportunities and Diversity Board (EODB) when the proposals have been clarified.

D. Financial implications

The current financial overview is set out in Appendix 1.

E. Background papers

None

F. Contact details

Report author: Sharon Burd, Director of Finance Services, MPS and Ken Hunt, Treasurer, MPA.

For more information contact:

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

Appendix 2

Report on robustness of the estimates

This report addresses the estimates as incorporated in the draft 2006/07 budget to be considered by Co-Ordination & Policing Committee on 4 November and the proposed full Authority meeting on 17 November, before formal submission to the Mayor. The submission will be subject to further review after the publication of the provisional grant settlement, expected early December, 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, including the Investment Board. 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. A series of budget scrutiny meetings have been held by the Chair of the MPA and a small group of MPA members comprising the two Vice Chairs, and Chairs of Finance and Policy, Performance and Review Committees. Individual MPS business groups and Management Board members were asked to present their detailed revenue growth and savings proposals for scrutiny by the members. The outcome of the review process for the proposed growth and savings items assessed possible impacts of any savings across business groups as well as on strategic priorities. A small number of suggested savings which would have an adverse impact across various business groups have been proposed for withdrawal or reduction during this review process. The MPS has also undertaken a separate service review which has examined in great detail the baseline budget; the MPA has been involved in this process. The Finance Committee, joint Finance & Planning Performance and Review Committee and full Authority has reviewed update reports on the draft budget submission. The budget submission will be formally considered by a special meeting of 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 provisional settlement. At this stage there is a definite risk that the grant estimates are overstated. There are also risks around the scale of additional costs in respect of the bombings/attempted bombings on 7/21 July 2005 and any effect this may have in 2006/07. To mitigate this the Authority took the decision to arrange a managed underspend of £26 million in 2005/06 and to freeze uncommitted reserves. This is still in place except for the proposed use of reserves to fund ‘one-off’ expenditure items in 2006/07; replenishment of these reserves will be considered. The Authority has submitted a substantial bid for additional counter-terrorism funds which will mitigate additional spend in this activity area in 2006/07.

4. In 2005/06 the Government took steps to cap council tax increases considered excessive. It is likely that capping will apply again in 2006/07. 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 2006/07. In the Mayor’s budget guidance it was noted that although this year’s government capping principles were on its view that budget requirements would be excessive if there were an increase in budget requirement of more than 6 per cent and council tax of more than 5.5 per cent, it is the latter that is particularly relevant to the GLA group. Accordingly a requirement to exemplify proposals to deliver a budget requirement with a 5.5% increase was requested. It is very possible that the budget to be submitted at this stage, including provision for further Safer Neighbourhood growth, will exceed the capping criteria for 2006/07 and will therefore have to be reduced before final approval by the GLA.

5. The draft budget requires delivery of savings totalling £74 million, plus a further £16 million to balance the budget. This is a higher figure than has actually been achieved in any of the last five budgets. There are significant items in the savings list that will require firm management and difficult decisions. Greater clarity is being sought as to how these savings will be achieved. It should be noted that the additional requirement for Safer Neighbourhood roll out in 2006/07 is excluded from these figures.

6. Monitoring of the 2005/06 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 changes will be reflected in respect of pensions in the draft budget for 2006/07 with the introduction of the new police pensions financing arrangements. 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 2006/07, a factor recognised during 2005/06 with the creation of the budget resilience reserve. 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 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 updated capital strategy has drawn together 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.

Ken Hunt
MPA Treasurer

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