Medium term financial projection 2001/06

Report: 6
Date: 17 April 2001
By: Treasurer and Commissioner

Summary

The report sets out medium term financial projections to 2006. Members are invited to consider the implications.

A. Recommendations

1. To note the initial medium term financial projections to 2006 including the potential variations;
2. To consider the implications of the financial projections and their presentation in future discussions.

B. Supporting information

1. At its meeting on 22 January 2001 the Committee received a report setting out the methodology for the development of the medium term financial projections and identifying those factors which were considered particularly significant. This report provides initial projections based on that methodology. The projections are based on current information and will need to be refined in the light of changes or developments in our knowledge.

Expenditure projections

2. Appendix 1 sets out projected expenditure over the next five years with a summary of the assumptions adopted for each item in Appendix 2. (See Supporting material for appendices)

3. The first column in Appendix 1 shows the build up of the approved budget for 2001/02. The second column takes the 2001/02 total expenditure and builds the 2002/03 projection with the additional/reduced costs in that year. The same approach is then adopted to produce subsequent years' projections.

4. The expenditure projections reflect:

• pay and price inflation;
• known committed changes, eg pensions growth, the growth in cost of the London pay lead, the ongoing cost of free rail travel, the impact of PFI contracts;
• the full year effect of the police manpower target included in the 2001/02 budget;
• the impact of increasing police manpower to 28,000 by the end of 2003/04;
• provision in respect of C3i;
• the transfer of NCS/NCIS to Home Office central funding;
• cashable efficiency savings;
• contributions to a reserve to meet exceptional pension costs.

Pay awards

5. The assumption for police and civil staff pay awards is 3 per cent per year. Given the magnitude of these budgets the revenue impact is sensitive to small percentage differences. An increase of an additional 0.5 per cent (ie 3.5 per cent total pay increases) would add £6m per year to the budget requirement.

Pensions

6. The forecast pensions growth includes civil staff as well as police pensions. The figures are consistent with the report on Pensions Costs 2001/02 to 2010/11 considered by the Committee on 20 February 2000. However the projections in the latter report were based on Personnel Department estimates for 2001/02 which differ from the approved budget. As a result the additional cost for 2002/03 shown in Appendix 1 is lower than reflected in the previous report. Contributions to and from the pensions reserve are also included in accordance with the illustrative model set out in the February report.

Compensation claims

7. The increase in the 2001/02 budget for compensation claims was assessed at a time when the budget for 2000/01 was expected to overspend substantially. In fact the projected outturn for compensation claims in 2000/01 is now an underspending. The rationale for further increases in future years is therefore doubtful. Liabilities insurance, when it can be effected, should limit future growth, although it is anticipated that there will still be a significant tail of claims relating to earlier years which will have to be funded during the period of the expenditure projections. It should be possible to get a clearer view of the position as a result of the work being undertaken by Willis.

PFI contracts

8. The revenue costs are shown without any reduction for PFI credits pending a response from the Home Office to our request that credits be granted in respect of the South East London scheme.

Police manpower

9. The full year effect of increasing the budgeted workforce to 26,650 is shown gross in the expenditure projection with the associated CFF funding included in the funding projection. The projections also show the effect of further increasing police manpower to 28,000 by 31 March 2004. At this stage this reflects an interpretation of the Mayor's election manifesto. Formal Mayoral priorities are expected to be confirmed shortly. Provision is included for uniforms and personal equipment for the new officers. Consideration has been given to any other associated additional costs but these are not regarded as significant.

Civil staff pay

10. No further provision has been made beyond the additional £22.2 million included in the 2001/02 budget to address civil staff recruitment and retention issues. The initial findings of the Hay review of the civil staff salary structure suggest that a further £15 million could be required to bring pay levels up the market median.

Airwave/C3i

11. Further work is being carried out on the projected costs of implementing Airwave. At this stage it is assumed that earmarked government funding will fully cover the additional costs. Additional running costs associated with a revised C3i project are included from 2003/04; the provision will be reviewed in the light of the options for C3i due to be reported to the Authority in May.

IT investment

13. The programme of IT investment will have to be reviewed in the light of the IS strategy and this may have implications for future revenue budgets.

Premises

14. Provision is included for backlog premises maintenance at an annual rate of £5 million from 2002/03, and also for additional accommodation at Mill Hill for recruit training.

NCS/NCIS

15. There is draft legislation currently before Parliament to replace the levies system for funding NCS and NCIS with central funding direct from the Home Office. The resulting reduction in police authorities' expenditure will be matched by a reduction in central government funding and there is therefore a compensating entry in our funding projection. If the legislation does not pass our budget would remain at risk from above-inflation increases in the levies.

Cashable efficiency savings

16. After 2001/02 these have been reflected at 0.5 per cent per year. This will need to be reviewed in the light of experience and the emerging efficiency and effectiveness and Best Value review programmes. The scope for achieving cashable efficiency savings will remain significantly constrained whilst police officer numbers cannot be reduced.

Unidentified items

17. Members will be aware that a large number of more or less committed items appeared as we went through the budget setting process for 2001/02. This present exercise has been largely centre-driven at this stage. It will be necessary to widen the involvement within the MPS in order to establish whether there are other significant factors not yet identified. The process of detailed budget scrutiny which this Committee will be overseeing during the next year will also inform the medium term forecasts.

Funding projection

18. Appendix 3 illustrates projected funding over the five year period. For the first three years the figures are based on published information contained in the Government's Spending Review 2000, as interpreted by the APA's financial advisers. Projections beyond 2003/04 are speculative. The assumptions made are set out in the notes to the table in the Appendix.

19. The grant projections do not assume any distributional changes arising from changes to the allocation formula. There has been a moratorium on changes to the formula methodology since 1998 which may be removed as early as 2002/03. It is very likely that, at that stage, the final element of the establishment factor will be eliminated. This would have the effect of reducing the MPA's allocation by around £20 million. The immediate impact of such a change may be damped but the full effect would be felt in due course.

20. There will be other potential threats with the lifting of the moratorium, for example a further challenge to the area cost adjustment. However there will also be an opportunity for the MPA to press arguments for changes favourable to London.

21. The funding projections deliberately make no assumption about increases in the council tax precept. These medium term projections will form an input to future discussions with the Mayor and GLA Assembly about the council tax implications.

Overall picture

22. The following table compares the expenditure projections set out in Appendix 1 with the funding projections in Appendix 3 to show the net surplus or deficit position.

23. The year-on-year precept increase shown in the penultimate line of the table assumes that the precept is increased each year to fund the identified deficit and therefore reflects the percentage change over the uplifted precept for the previous year. The cumulative line measures the increase against 2001/02 as the base year.

24. The position in 2002/03, on the basis of these projections, shows a deficit of £22.5 million that would require a 7.2 per cent increase in the precept to fund it. This arises because of a difference of 1.1 per cent between the expenditure increase and the projected funding increase. Half of this shortfall is accounted for by the net funding requirement for additional officers and the remainder largely reflects particular London requirements, ie the net additional cost of the London pay lead plus the requirement for the MPA to pick up the tab for officers' free rail travel from 2002 onwards.

25. The position worsens substantially in 2003/04, which, on these projections and with no further action, would require an increase in the precept of 14.8 per cent over the previous year. The principal reasons for this are:

• the provision for increasing police officer numbers up to 28,000 without any matching funding from government grant. The growth in officer numbers supported by CFF funding runs out next year;
• the cost of PFI schemes in the absence of any confirmed PFI credits;
• the potential running costs of C3i;
• the building up of a pensions reserve in addition to the immediate growth in pensions costs;
• a reduction in the anticipated increase in government funding generally.

26. After 2003/04 the projected annual precept increases fall back into single figure percentages. The Authority should have a view about the acceptability of any particular level of precept increase but ultimately it is a matter for decision by the Mayor and Assembly. The Authority's projections will therefore have to be the subject of a dialogue with the GLA.

Potential variations

27. All forecasts are subject to error and the underlying assumptions may not be borne out in practice. Appendix 4 therefore models a number of variations from the projections set out in Appendices 1 and 3, shown as 'best' and 'worst' cases.

28. The variations modelled in the 'best' case option are as follows:

• pay inflation at 2.5 per cent rather than 3 per cent;
• receipt of PFI credits of £5 million per year in respect of SE London;
• grant to meet 100 per cent of the cost of the additional pay lead;
• an extended timescale for achieving the target 28,000 officers, by 31 March 2006 rather than 31 March 2004;
• an assumption that the impact of Best Value and other efficiency and effectiveness reviews will yield higher cashable savings in 2003/04 and 2004/05;
• an assumption that the pensions reserve can be partly fed from underspendings or year end adjustments.

29. The changes reflected in the 'worst' case are as follows:

• pay inflation at 3.5 per cent rather than 3 per cent;
• the effect of eliminating the establishment factor from the grant allocation formula;
• an assumption that the tail of compensation claims cannot be contained within current budget levels;
• provision for a further £15 million to meet the full recommendations from the Hay review;
• an assumption that actual cashable efficiency savings fall short of the projected 0.5 per cent per year.

30. It should be stressed that some potential variations are more likely than others, and that positive and negative variations are likely to emerge in combination. Therefore the total 'best' and 'worst' case positions should be treated with extreme caution. However the appendix does give an indication of the scale of the impact of particular variations and therefore the need to caveat the singular results set out in paragraph 21 and the need to keep the forward projections under regular review so that they can be adjusted as and when relevant changes are identified.

Strategic response

31. If the identified funding deficit has to be reduced because the precept will not be increased to cover it, there are a number of potential strategic responses. They would also be relevant if the Authority wished to pursue policies which required additional resources without funding from the precept.

32. Maximise government funding from all sources including PFI credits, pay lead funding, support for C3i, securing adequate recognition of increased demands in the next public spending round, developing the case for favourable changes to the allocation formula.

33. Pursue rigorously opportunities for cashable efficiency savings from all sources in order to improve on the 0.5 per cent per year target included in the projections.

34. Review the current aspiration to increase to 28,000 police officers by 31 March 2004. The increased cost of moving beyond the present budgeted target of 26,650 is £39.7 million in 2003/04 rising to £51.3 million from 2004/05 onwards.

35. Adopt a policy on creation of reserves which utilises opportunities as a result of any in-year underspendings to limit the direct call on the precept.

36. Ensure that risk management and insurance arrangements are put in place that will reduce the continuing drain on resources through compensation claims.

37. Members' views are sought on the projections set out in this report and their implications, and on the presentation of the position in future discussions with the Mayor and Assembly.

C. Financial implications

The medium term financial projections will set the context for determining future years' budgets.

D. Background papers

• MPA/MPS Budget files

E. Contact details

The author of this report is Peter Martin, Treasurer.

For information contact:

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

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