Medium term financial plan 2001/06

Report: 6
Date: 22 January 2001
By: Treasurer & Commissioner

Summary

The report informs Members about the key objectives of developing and reporting a medium term (three to five year) financial plan, together with the proposed methodology to be used. It identifies those factors and policies that will impact on the medium term planning process, and it is intended that the base for the medium term plan will be the 2001/02 budget once this has been clearly and finally established.

A. Supporting information

Introduction

1. At its meeting of 14 December 2000 the Metropolitan Police Authority considered the budget proposals for the year 2001/02 and options in the light of its own emerging priorities together with those of the Mayor. The funding implications of the proposed budget were also considered and the Mayor informed of the MPA Members' wishes. The budget remains subject to ratification by the Mayor, and determination of the NCS/NCIS levies by the Home Secretary.

2. Once the 2001/02 budget is finalised, the resulting base information will then be input into a financial model of the impact of known/anticipated factors and likely policy drivers over the three to five year period commencing with 2001/02. The intention would be to report the predictions produced by the model to the February meeting of this Committee (if the final budget decision is clear in time) and subsequently in support of the ongoing strategic planning process.

Key objectives of medium term financial planning process

3. To provide information on the likely financial implications of strategic planning proposals, and to provide advance indications of potential financial constraints that may impact or influence longer term plans.

4. To further support the planning process by facilitating the allocation of resources in a way that is consistent with identified priority business needs and objectives.

5. To recognise the need for multi-year planning to achieve significant investments and organisational changes as well as savings through efficiency and Best Value review programmes.

6. To facilitate the development of appropriate strategies to address future financial issues.

Outline of the proposed methodology to be used

7. The budget data developed for 2001/02 will be used as the base, and from this a "high level" financial model developed.

8. The model will bring into account known and predicted expenditure pressures see paragraph 11 below.

9. The model will seek to reflect views and information regarding likely funding availability, see paragraph 20 below.

10. Since the planning of financial implications and impacts for periods of up to five years ahead will invariably contain assumptions that will prove to be wrong, the proposed model will seek to identify the degree of potential variation by:

• Incorporating anticipated risks to the forecast and feeding data into sensitivity calculations;
• Incorporating sensitivity factors based on intelligence regarding economic, social and political trends;
• Regularly feeding new data into the model to ensure that it reflects the latest information.

Predicted medium term pressures on MPS expenditure

11. Since a medium term plan is meant primarily to be indicative of the key elements making up the expenditure commitments of the organisation, the following most material items have been identified as the main cost drivers:

• Manpower numbers and turnover levels – both police officers and civil staff;
• Inflation, especially annual pay settlements and including London pay lead;
• Pensions costs and liabilities including capital transfers following outsourcing;
• Outsourced activities (contracts) and expected volumes;
• PFI initiatives and their ongoing revenue implications;
• NCS/NCIS Levies;
• Best Value Reviews and the requirement for Year-on-Year efficiency savings;
• Service developments, including statutory changes (eg DNA testing, forensic examiners, compensation payments, video conferencing of vulnerable witnesses, etc.);
• Capital Programme, including accommodation requirements;
• Insurance and risk liability management;
• Establishment of appropriate reserves and provisions.

12. Employment and related costs have in recent years accounted for nearly 70 per cent of MPS net expenditure, three quarters of which relates to police officers. The 2001/02 budget for additional police officers is based on an average half year cost resulting in immediate "growth" implications for future years' budgets to reflect the full year cost. Police officer pay settlements have generally run ahead of inflation in recent years and represent a critical element in any expenditure projections.

13. A specific report will be submitted to the February Committee on the issue of potential pensions liabilities. The report will identify potential "bulges" in commutation liabilities that will occur if higher than normal numbers of police officers qualify for retirement in any of the years under review. This data will be built into the medium term financial model.

14. The level of and impact of contractual commitments for outsourced services will be identified and incorporated within the financial model.

15. At least two building related PFI's are identified as being likely to have significant impact on expenditure during the three to five year review period, i.e., Firearms and Public Order Training Facility and South East London Police Stations both of which are expected to incur revenue costs from 2003. The C3I project however it is delivered, will have significant financial consequences in later years, and its likely impact will be included. It is closely associated with PSRCS/Airwave implementation which will also have significant implications for both expenditure and funding.

16. The NCS/NCIS Levies are outside of the immediate control of MPS, and have historically grown at a rate that considerably exceeds inflation levels. Significant growth in the levies clearly impacts on the amount available for the provision of MPS front line services. There are also proposals under consideration for changing the basis of funding the national authorities and the impact of these will have to be assessed.

17. The Committee has agreed the programme of Best Value fundamental performance reviews, and these coupled with the proposed programme of efficiency and effectiveness reviews commissioned jointly by the Mayor, the Authority and the Commissioner will be taken into account in forecasting the incidence of future expenditure.

18. The limited funding available for capital purposes over the next five years has already been reported, and the Treasurer is initiating a review to identify alternative means of funding. This review may result for example in employing operating leases as a means of funding with inevitable revenue implications or the increased use of revenue finance to fund capital projects.

19. The potential level of reserves will be continually reviewed in the light of MPS actual and predicted financial position.

Significant funding items

20. The following are the key elements of funding for MPS, now and in the immediate future:

• Police Grant;
• Revenue Support Grant and NNDR Pool Distribution;
• Special Payment;
• Crime Fighting Fund;
• Airwave funding;
• Pay Lead Grant;
• DNA Grant;
• Fees and charges;
• Council Tax (Precept raised by GLA).

21 The general shape of government funding for the period 2001/04 was determined by the Spending Review 2000 (SR2000). Much of the detail has been clarified as a result of the financial settlement for 2001/02. It should therefore be possible to make reasonably firm predictions for the first three years of our review period. They are likely to be more speculative for the later years.

22. Police Grant, Revenue Support Grant and NNDR Pool distribution are the most significant sources of funding and are distributed in accordance with Government formulae. There is currently a moratorium on methodology changes to the formula but that is likely to be lifted during the planning period. Potential changes and their impact on the MPA's funding will need to be considered.

23. The Special Payment is made to MPS in recognition of capital city, national and international activities undertaken by MPS. It is out intention to review the basis and operation of the Special Payment during this year with a view to assessing its adequacy and identifying reasons why it should be increased.

24. The earmarked grants have a degree of uncertainty about their continuation, and to what extent they may be replaced by other funding methods. The status of the special grant for the increased pay lead is particularly uncertain, whilst the Crime Fighting Fund is due to expire in 2002/03 and the DNA Grant in 2003/04. The MPA's entitlement to Airwave funding is due to commence in 2002/03 but again the long term basis of this support is unclear.

25. The share of GLA precept monies will be influenced by the priorities of the Mayor and the Assembly, and a view will be incorporated as to the level of growth over the medium term.

Policy developments

26. The medium term financial projections will reflect currently agreed policies, especially as reflected in the 2001/02 budget approval. Potential future policy developments will be identified and their financial implications illustrated in the context of the medium term financial position. These will relate particularly to future levels of police officer numbers. This should take place as part of an iterative process for the development of future policy.

B. Recommendations

1. That the Committee notes the factors that will be included in the medium term financial plan 2001- 2006 to be presented to the Committee in February 2001.
2. The Committee is invited to advance other factors which may have an impact over the review period.

C. Financial implications

There are no financial implications arising directly from this report.

D. Review arrangements

There will be a medium term financial plan submitted to the February (or March depending on the progress of budget approval in the GLA) meeting of the Committee, and then periodically thereafter as considered appropriate by the 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 this report is based and which have been relied on to a material extent in preparing the report. These are available on request to either the contact officer below or to the Clerk to the Police Authority at the address indicated on the agenda.

• MPS Finance Department Budget Files
• MPA Treasurer's Budget Files

F. Contact details

If you require any further information relating to this report, the author is Peter Martin.

For information contact:

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

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