2000/1 financial outturn report

Report: 8
Date: 19 June 2001
By: Commissioner and Treasurer

Summary

This paper sets out the provisional financial outturn for 2000/01 with the implications for the Authority's reserves. Preliminary explanations for budget variances are provided and a process is set out for a more detailed review.

A. Recommendations

1. The Committee to note the outturn position (subject to external audit) of a £7.9m overspending.
2. The Committee to endorse the rationale for the limited use of financial reserves and provisions, and that if this result is finally confirmed the Authority's opening balance sheet for 2001/02 will have a general reserve of just £12.1 million.
3. The Committee also to note the proposed action to conduct a more detailed outturn review with a report back to the Committee in July.

B. Supporting information

Introduction

1. The financial year 2000/01 was one of major significance for the Metropolitan Police Service in terms of its financial management arrangements.

2. In addition to the statutory arrangements for constitutional changes, the creation of the Metropolitan Police Authority in July necessitated a switch in mid-year from a cash accounting regime to that operated by local authorities which is based on accrual accounting.

3. The importance of professional financial expertise at Management Board level was recognised with the creation of the Director of Resources post to take on many of the former functions of the Receiver. The MPS recruited an experienced qualified accountant to this new post.

4. The year, which saw the completion of organisational realignment focusing on borough-based policing, recorded improved service delivery and performance but this has put a significant strain on financial resources at a time when the financial legacy from the Home Office has not been a strong one. Budget management arrangements were not adequate to control the financial consequences.

Current position

5. Members will be aware, through previous FPBV written and oral reports, that significant variances to budget have been forecast in a number of areas although for most of the year the overall forecast was broadly in line with budget.

6. The accounts closing process has reached the stage where the majority of year-end transactions have been validated and reconciled and there has been scrutiny of key expenditure and income lines to ensure correct accounting treatment. Correct accounting treatment is particularly important given that 2000/01 represents the first year-end under a full accrual regime.

7. The current position shows an overspending of £7.9m which is less than ½ per cent of total budget – although further review work is continuing. The outturn is detailed by expenditure type see Appendix 1 – and by Business Group see Appendix 2.

8. Major areas of overspend are:

• Police pay:
  £19m overspend – offset by £11.3m London pay lead grant and £3.5m additional Crime Fighting Fund – net overspend £4.2m. Within this, £6.2m relates to London Pay lead costs following the Home Office decision not to fund this pay initiative in full.
• Police overtime:
  £24m overspend - offset by £7.3m of related grant (detailed in paragraph 12 below) – net overspend £16.7m. This overspend reflects the understrength of police officers throughout the year combined with increased activity. There have been changes to business practice in murder investigation and the specific development of Operations Trident and Crackdown. The organisation has achieved major improvements in crime performance – but at a cost, which has not been effectively managed. The Home Office did not fund the full cost of the May Day operation despite earlier indications. Further analysis of this overspend is set out below.
• Operational Supplies and Services:
  £19.4m overspend – mainly comprising £3.9m overspend on vehicle removal contract, and an overspend on DNA related expenditure of some £6.3m. Further overspends occurred on vehicle hire budgets. Other outsourced contracts have increased in cost.
• Information and Communication Technology:
  £6.9m overspend, on communication networks and telephone costs – this reflects the scale of organisational change within the MPS during 2000/01 and a lack of clarity on aspects of the IT/Comms related outsourcing contracts.
• Other Service Costs:
  £2.9m overspend predominantly due to higher spending on external consultants. This included the C3i PFI and two other, property based, PFI arrangements, all of which proved more complex and time-consuming than originally planned.

9. Offsetting underspendings are:

• Pensions:
  £17.5m – reflecting fewer officers taking medical retirement and a slightly reduced number of officers leaving on ordinary pensions.
• Compensation:
  £4.9m – proactive MPS management action has contributed to reduced compensation costs.
• Civil staff pay:
  £8.2m – very high vacancy levels throughout year (offset by increases in civil staff overtime). Departments staffed mostly by civilians show the largest underspends
• Interest on cash balances:
  £5.3m – Favourable cash flow as a result of government grant profile and relatively buoyant interest rates.
• Other income:
  £5.1m

Use of reserves and provisions

10. The opening balance sheet of the MPA incorporated reserves and provisions to meet future liabilities. The 2000/01 outturn position now reported incorporates the application of the following:

• MPA Set up Reserve (£1.0m):
  defraying the costs associated with the establishment of the MPA, eg: the taking out of buildings insurance for the first time and higher audit fees with the change in regime. This will leave £0.5 million in this reserve;
• Bad Debt Provision (£1.0m):
  writing back to revenue of that element of the provision no longer required due to a favourable ACPO decision on the basis for the recoupment of the costs of seconded officers to the national squads;
• Compensation Provision (£4.0m):
  a provision made on the basis of a historically consistent rise in the number and value of claims is no longer required, given legislative changes to courts procedures and a more robust approach to claims management on the part of the MPS. The application of this provision is reflected in the underspending on compensation claims reported at paragraph 9 above.
• Capital Reserves (£2.0m):
  MPS managers have exercised their devolved freedom to use their revenue budgets to purchase, in total, £2m worth of capital items. In the light of the overall revenue position, it is proposed that capital receipts rather than revenue budgets are used to fund this expenditure. It is recognised that this action will have a detrimental impact on the level of capital reserves available to the capital programme in future years.
• General Reserve:
  the net overspending of £7.9 million will have to be met from the general reserve of £20 million leaving an opening balance for 2001/02 of just £12.1 million.

Business Group outturn position

11. The table below summarises the out-turn position by Business Group, listed in order of budget:

12. A detailed analysis of the net overspend on overtime referred to in paragraph 8 above is set out below:

13. In November 2000, the MPS Resource Allocation Committee reviewed emerging budget pressures in Territorial Policing and, in the light of the substantial underspending then emerging on pensions, confirmed that £3.5m of TP expenditure could be offset against this underspending. Some £2.3m of this has been earmarked against overtime. £0.5m was earmarked for minor works to improve locker rooms and front office reception areas.

The way forward

14. The outturn position recorded in this report reflects a number of issues essentially around the absence of a strong finance culture and financial expertise throughout the organisation. This has been raised with Members in the past and the restructuring of the Finance function, now being progressed, focuses on strengthening both the corporate centre (challenge and review functions) and the finance resources which directly support operational policing. A major recruitment exercise commences with senior posts advertised from 10th June and continues through to October/November for all grades. Interim appointments have been made to support existing staff. The provision of market related allowances for existing finance staff is currently under review – this is seen as essential to retain existing staff whilst the corporate review of civil staff pay is completed.

15. An outturn review exercise will be completed involving each Business group to inform a more detailed report to the MPA in July. Members may wish to note that HMIC are supportive of the outturn review exercise and are offering advice on its development. In view of the shortage of professional finance staff within the MPS and with the agreement of the Treasurer and Director of Resources, an approach has been made to KPMG (as part of the external audit arrangements) to support the review exercise as an extension to the statutory audit requirement.

Conclusion

16. It was evident during the latter months of 2000/01 that organisational realignment and shortcomings in the budget setting process for that year were contributory factors to the significant variances appearing in particular income and expenditure areas. This necessitated the MPS taking the approach of managing the financial position to the overall "bottom line".

The lack of suitably trained professional finance support and a lack of clarity as to budget ownership and accountability contributed to the poor quality of financial forecasting which did not recognise the magnitude of the year end deficit. Action is underway to strengthen financial support and skills. The second issue requires the acceptance within the organisation of the importance of financial control and the requirement to deliver performance within the financial resources provided. This means a further focus on the delegation and devolution of budgets to the appropriate level combined with an unambiguous commitment for managers to be held accountable for financial performance and service delivery.

D. Background papers

• MPS Finance Department Revenue Budget Monitoring Files

E. Contact details

The author of this report is Peter Martin.

For information contact:

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

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