Opening financial position

Report: 7
Date: 21 November 2000
By: Treasurer

Summary

This paper considers the opening financial position of the MPA in the light of the latest available figures and recommends endorsement of the position adopted in the paper.

A. Supporting information

At the 19 September meeting, the Committee received a report that outlined the work being undertaken to establish an opening balance sheet for the Authority. This report details the outcome of that exercise and sets out the reserves and balances which are available as at 3 July 2000.

Members will recall that the previous report set out the rationale for creating earmarked revenue reserves and maintaining a prudent level of general reserves to underpin the Authority’s financial management strategy. Areas of consideration for ear-marked reserves were identified as:

• TUPE employee pensions transfer (£11m - £30m).
• Police Pensions (lump sum payments - up to £50m additional cost).
• Insurance and Compensation (£10m).
• Modernisation.
• Budget Management.
• Partnership.

In reviewing the level of general reserves appropriate for an organisation of the size of the MPA, reference was made to the CIPFA Police Panel view that a level of between 2% and 5% was desirable. In practice it was noted that the larger metropolitan county police authorities have general reserves below the 2% level, and for the MPA, a general reserve of 1% (£20m) could be regarded as a minimum if there were appropriate ear-marked reserves, reasonable insurance arrangements, a well-funded budget and effective budgetary control.

A realistic level of general reserves could help to address any extraordinary, unexpected and unbudgeted costs or provide breathing space to manage the implications of any adverse movements in funding of the service. However, it has to be recognised that reserves can only be used once and additional funds have to be raised through the precept or grant or by reduced expenditure, to replenish them.

Opening position

The opening balance sheet for the Authority is detailed in Appendix 1. Explanatory notes for each balance sheet item are incorporated in Appendix 2. The reality of the opening position is that, compared to the rationale for ear-marked reserves outlined above, a figure of £24.148m is the maximum that can be provided for, as set out in the table below:

The purpose of each of these reserves is described below:

• Usable capital receipts reserve. This represents receipts from the sale of assets which have not yet been applied to finance capital expenditure. There is a report on the capital programme elsewhere on this agenda. At the end of this financial year this reserve is expected to be about £50 million and its application needs to be spread over a number of years to supplement the limited resources available for capital funding.
• Earmarked reserve - funding for 2000/01 revenue budget. As was reported to the Authority in July the MPS Management Board, prior to the establishment of the MPA, had revised the budget to address identified pressures. As part of this revision a sum of £3.312 million was utilised from the cash balances.
• Earmarked reserve - MPA set-up reserve. A budget for the MPA’s direct costs was originally established some twelve months ago, long before there was any clear idea of the Authority’s requirements. That budget was enhanced as part of the budget revision referred to in the previous paragraph. However costs are now being incurred as a result of the Authority addressing its responsibilities for which there is no budget provision. A good example is insurance premiums. The set-up reserve provides a source for funding such costs during the first year of the MPA.
• Earmarked reserve - lump sum transfers. The sum set aside here is an estimate of the cost of lump sum pension transfers in respect of past service for former employees affected by outsourcing arrangements that are already in place. It does not provide for future transfers, e.g. in relation to C3i.
• Earmarked reserve - police pension commutations. There is a provision in the balance sheet for pension commutations in respect of officers who will certainly retire during 2000/01 (£10.7m). There is also budget provision for a ‘normal’ level of retirements (£40m). However the number of officers who have completed their pensionable service and could choose to retire at a months notice would lead to a total bill for commutations of around £100m. Advice from the Audit Commission in the near future is expected to say that authorities should be reserving for this potential liability in full. That may not be feasible in the case of the MPA. In any case we only have about £8 million remaining to start such a reserve. This leaves around £40 million unprovided for, but the risk of the whole potential liability falling due in one accounting period, on the basis of past experience, is very low.
• General reserve. Although the conditions for regarding as acceptable a general reserve as low as 1% have not been fully met, it is essential that we do have such a reserve at least at that level.

It is also necessary to recognise what we have not reserved for. There is no reserve for compensation claims. The budget provision has been increased substantially in recent years in response to the rising costs. For 2001/02 there is a further increase of £6 million (c 25%) reflected in the draft budget. Better information about the potential costs should emerge from the current insurance reviews. Liability arising from current events will be limited once the insurance arrangements are in place.

There is also no reserve for potential transitional costs associated with the implementation of PSRCS, e.g. double running, or in relation to C3i, e.g. lump sum pension transfers.

I have previously indicated my concern to the Home Office that the sums inherited by the MPA may not provide for adequate reserves and I reserved the Authority’s position to enter into further discussion on the issue. It is very unlikely that the Home Office would be able to do anything directly in response to the Authority’s concerns but it may be appropriate to register the Authority’s view nevertheless

External audit

The authority’s external auditors, KPMG, have been kept appraised of the approach being taken in constructing the opening balance sheet for the MPA and have expressed their satisfaction that this should produce a robust set of figures which can be used with confidence. An audit quality assurance exercise is now underway to provide external validation of the balance sheet figures set out in this report.

B. Recommendations

1. That the Committee endorse the level of reserves proposed and their allocation;
2. That agree the need for further review of the reserves in the light of the 2000/01 outturn and 2001/02 budget; and
3. That the Committee consider whether any representation should be made to the Home Office.

C. Financial implications

The financial implications of this report are those set out previously in Section 2.

D. Review arrangements

Future reports to Committee if considered appropriate by Treasurer.

E. Background papers

The following is a statutory list of background papers (under the Local Government Act 1972 S.100 D) which disclose facts or matters on which the report is based and which have been relied on to a material extent in preparing this report. They are available on request to either the contact officer listed above or to the Clerk to the Police Authority at the address indicated on the agenda.

• Opening position working papers.

F. Contact details

The author of this report is Peter Martin.

For information contact:

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

Appendix 1: Balance sheet as at 2 July 2000

Appendix 2: Balance sheet notes

Land and buildings
the value of property assets is kept updated through a four- year rolling programme of valuations, as required by the Accounting Code of Practice.

Vehicles, plant and equipment
short life assets that are included at historical cost as a proxy for current value.

Works in progress
the value of capital expenditure on fixed assets that are not complete as at 2 July.

Capital prepayments
payments for a programme of replacement and updating of IT assets: interest is receivable on these advance payments.

Stocks
clothing, transport spares, petrol and fuel oil and furniture - valued in the balance sheet at cost.

Debtors and prepayments
third parties who owe money to the MPA together with a number of prepayments as at 2 July principally for property rents.

Short term investments
surplus funds placed with a range of approved parties e.g. other local authorities and building societies.

Cash and bank balances
incorporating the impact of cheques issued but yet to be presented - the actual cash position was in credit as at 2 July.

Creditors and accruals
third parties to whom the MPA owes money e.g. suppliers.

Long term borrowing
from the Public Works Loan Board is a component of the financing of the capital programme.

Provisions
established for stock write off, bad debts, insurance claims, lump sum retirements and the anticipated impact of recent changes to employment terms and conditions.

The three accounting reserves set out in the balance sheet reflect the entries necessary under the capital accounting regime:

Fixed Asset Restatement Reserve
reflects the increase or decrease in fixed asset values generated by revaluation, together with the written-off values of asset disposals.

Capital Financing Reserve
incorporates entries reflecting the use of capital receipts to fund capital expenditure.

Government Grants Deferred Account
incorporates entries reflecting the use of capital grants to fund capital expenditure.

Usable Reserves
as set out in the report.

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