Medium term financial forecast 2002/5

Report: 12
Date: 19 June 2001
By: Treasurer & Commissioner

Summary

The report considers the implications of the process for developing the 2002/03 budget as proposed by the Mayor. Medium term financial forecasts are presented for the Committee's approval for submission to the Mayor.

A. Recommendations

1. That the Mayor and GLA be made aware of the Authority's concerns about the budget timetable and assurances be sought as to the degree of amendment that will be possible following the detailed budget submission at the end of October.
2. That the committee note the timetable for member consideration of budget proposals and the GLA be asked to clarify the precise timetable during December so that the Authority can make any necessary amendments to its meeting dates.
3. That the Committee consider and approve or amend the medium term financial forecasts set out in this report for submission to the Mayor.

B. Supporting information

Introduction

1. At its meeting on 14 June the MPA received a report setting out the budget process for 2002/03 as proposed by the Mayor. The Authority was recommended to agree that this Committee should assess the implications of the proposed process and approve the MPA's medium term financial forecasts for submission to the Mayor.

Budget process

2. Appendix 1 (see Supporting material) gives a detailed description of the budget process which accompanied the Mayor's letter to the Chair of the Authority. The timetable for developing the budget is set out in Annex C of Appendix 1. Key milestones are as follows:

• MPA to submit initial three year forecast in mid June;
• Mayor to issue budget guidance, late June'
• MPA to submit detailed budget by 26 October;
• MPA to refine budget submission by early December;
• MPA to confirm estimates in mid January after consultation and before Mayor submits draft budget to the Assembly;
• Mayor/Assembly approve budget mid February.

3. Section 3 of  sets out the Mayor's priorities which are to be reflected in the budget. For the MPA these are specifically 'increasing the overall number of police officers and the number engaged on front line crime fighting services, continuing the investment in crime fighting technologies and greater managerial efficiency.'

4. In developing the budget detail functional bodies should demonstrate that 'major budget initiatives:

• have clearly articulated outcomes;
• have been through an effective evaluation process, including feedback on delivery on this year's priorities; and
• fully reflect the importance of equality of opportunity.' (paragraph 4.6).

5. The budget process will be directed via budget steering groups between the GLA and individual functional bodies and at least two meetings will involve the Mayor.

Implications

6. The timetable is likely to present some difficulties. The medium term financial forecasts will be submitted following this meeting in accordance with the requirement. However the next stage requires a detailed budget by the end of October. The Mayor's paper suggests that this allows functional bodies more time by comparison with last year when intermediate draft budgets were submitted by the end of September. In practice though the bulk of the work to develop the MPA's budget last year was carried out in October and November with the key decisions taken by the Authority on 14 December 2000.

7. A budget submission in October will have to rely on quite limited information about spending in the current year, no more than five months at best. The results of a detailed review of the 2000/01 outturn will probably still be being digested. There would be little or no outcome from the efficiency and effectiveness review programme. The issues of finance function capacity will still be largely unresolved. It is difficult to see how we could avoid the need for substantial budget development work through to the beginning of December at which point the funding settlement may prompt significant revision anyway.

8. It is suggested that the Authority should convey these concerns to the GLA and seek an assurance that substantial amendments to the October submission will be acceptable as part of the 'refinement' envisaged by December.

9. Assuming that such assurances are forthcoming the process could map onto the planned Authority and Committee meetings as follows:

The one potential problem in this timetable is in December where the Committee date looks too early given the need to absorb the implications of the 10. The one potential problem in this timetable is in December where the Committee date looks too early given the need to absorb the implications of the funding settlement, which is usually announced at the end of November, whilst the Authority date is probably too late to fit the GLA's plans. It is suggested that we secure a specific date for the December submission and review our own meeting dates in the light of that.

Requirement for medium term financial forecasts

11. The GLA paper asserts the need for a longer term planning process in order to achieve integration of the business planning, best value and budget processes. The intention is therefore to prepare a financial forecast for the GLA group covering the three years 2002/03 to 2004/05. This forecast will reflect among other things:

• new obligations, Mayor's priorities and other service changes;
• demand for services;
• scope for efficiency savings from best value and other reviews (eg 3 year MPS efficiency and effectiveness review);
• expected government grants;
• council tax levels.

12. The forecasts will provide a basis for deciding on a strategy to deal with future financial issues and that strategy will be reflected in the detailed budget guidance that will be issued to the MPA and other functional bodies for the preparation of 2002/03 budget submissions. The forecasts will be maintained on a rolling three year basis.

Medium term financial forecasts

13. The expenditure projections are set out in Appendix 2 (see Supporting material) with a summary of the assumptions adopted for each item see Appendix 3. Funding projections are displayed see Appendix 4 (see Supporting material).

14. The forecasts presented in this report have been modified by comparison with the medium term projections reported to the Committee in April in the following respects:

• they cover the three year period specified by the Mayor, ie 2002/04, rather than the five years (2001/06) reported to the Committee;
• expenditure has been separated between committed increases and policy developments;
• the expenditure coverage reflects specific proposals made by members of the Committee.

15. Legislation has recently been passed which replaces the levies system for funding NCS and NCIS with central funding direct from the Home Office. It is expected that this will take effect from 2002/03. The resulting reduction in police authorities' expenditure will be matched by a reduction in central government funding and the same adjustment has therefore been made to the expenditure and funding projections.

Expenditure projections

16. The expenditure projections see Appendix 2 fall under four main headings:

• Pay and price inflation - (line 4)
• Committed changes - (lines 6 to 21)
• Cashable efficiency savings - (line 23)
• Policy developments - (lines 27 to 39)

Pay and price inflation

Pay awards

17. 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.

Committed changes

Police manpower

18. The full year effect of increasing the budgeted workforce to 26,650 is shown gross in the expenditure commitments with the associated CFF funding included in the funding projection. Police pay costs will also increase with new officers entitled to receive the increased London pay lead and with the additional payments approved by PNB earlier this year to address housing allowance anomalies. From 2002/03 the Authority will have to pick up the full cost of providing free rail travel to police officers. The Committee has previously approved arrangements for increasing accommodation for recruits at Hendon. The commitment to increase officer numbers is bringing financial pressure as a result of the additional recruitment effort. These costs have not been separately identified but will have a detrimental impact on the ability to rationalise Personnel function accommodation. A report elsewhere on the FPBV agenda indicates that the provision of residential estate held as a recruitment aid (especially Section Houses) will not meet demand as officer numbers increase. Proposals to increase the availability of residential accommodation will also add financial commitments for future years.

Pensions

19. The forecast pensions growth includes civil staff as well as police pensions. However the figures for civil staff reflect the decision to transfer the Met civil staff pension scheme fully into the civil service scheme which should stabilise costs after 2002/03. Contributions to and from a pensions reserve are reflected in the policy developments.

PFI contracts

20. The revenue costs are shown without any reduction for PFI credits pending a formal response from the Home Office to our request that credits be granted in respect of the South East London scheme. Informally Home Office officials have indicated that the request has little chance of success. The pension transfer payments are associated with the PFI schemes.

Airwave/C3i

21. 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; this is consistent with the Authority's decision in May on the strategic option for C3i. Capital resources for this strategic option still need to be secured from government sources.

Premises

22. Provision is included for backlog premises maintenance at an annual rate of £5 million from 2002/03.

DNA expansion programme

23. The Home Office has earmarked funding for an expansion of DNA collection and testing. The expenditure included here is matched by additional grant in the funding projection.

De minimis capital

24. This sum represents an assessment of the additional expenditure flowing from the capital programme which would fall within the £5,000 limit.

Interest receipts

25. An expected shortfall of investment income against the current year's budget is explained elsewhere on the agenda. The circumstances which give rise to it are likely to persist for the foreseeable future.

Cashable efficiency savings

26. Cashable efficiency savings are included at an annual rate of 0.5 per cent of total budget. This is consistent with the lower end of the range of potential efficiency savings quoted in the Accenture report. It should be remembered that at this stage there still remains a substantial shortfall against the target of 1 per cent cashable efficiencies in 2001/02.

Developments

Police officer numbers

27. Provision is included under policy developments for a continuing growth in police officer numbers to 28,000 by 31 March 2004. This is consistent with the Mayor's policy priority to increase officer numbers. It will be necessary to demonstrate that there will be a commensurate increase in the number engaged on front line crime fighting services. The estimates include the associated costs for the basic equipping of new officers. No provision has been made for the impact on accommodation space e.g. locker facilities, nor the pressure on vehicle availability and operational support services, some of which are delivered through third party outsourcing arrangements.

Civil staff pay

28. A sum of £15 million per year has been included in respect of civil staff pay, in addition to the growth of £22.6 million in the current year, in order to bring pay levels fully up to the market median in accordance with the findings of the Hay review. This does not include any expansion of civil staff to support additional police numbers nor to increase the civilianisation of police duties. No account has been taken of increases to Warden numbers either.

Performance management

29. The MPS is committed to adopting a performance management framework that will provide an integrated and corporate approach to driving and managing performance that ensures MPS managers and stakeholders have access to appropriate, high quality and timely information critical to the success of the organisation. It will support and encourage efficient and effective decision making and action whilst promoting clear accountability for performance. Much progress has been made over the last year in implementing elements of the framework but there are still some key areas – quality assurance, information systems (particularly costing) and analytical capability – where more resourcing will be needed if the full benefits are to be realised.

Serious crime

30. Changes to policing methods to address serious crime combined with increases in incidents of violent and gun related crime is having a significant impact on financial resources. This area requires the availability of experienced officers. The resource difficulties in this area are reflected currently in overspending against the overtime budget.

Reserves

31. The effect of the 2000/01 outturn is to reduce the Authority's general reserve to around £10 million. This is just 0.5 per cent of total budget. It would only take one more year's overspending at the rate of last year to eliminate the reserve completely. The Committee has previously agreed that a 1 per cent general reserve (£20 million) is the minimum acceptable provided that there are appropriate accounting provisions and earmarked reserves, reasonable insurance arrangements, an adequate budget and effective budgetary control. Those conditions have still not been fully met. It is essential that steps are taken to restore the balances at least to the minimum acceptable level.

32. The developments also include the establishment of a pensions reserve in accordance with the policy proposed to the Committee in March. This is an important step in putting in place appropriate earmarked reserves.

Bids carried forward from 2001/02

33. A number of priority development bids were not accommodated within the 2001/02 budget. The rationale for these remains largely as valid as when they were presented to the Authority in December 2000 and they have therefore been brought forward for consideration in the context of the 2002/03 budget.

Capital programme

34. The Authority has not yet approved its capital programme beyond the current year. At this stage it is therefore not possible to identify revenue implications. There is currently a review of the procurement arrangements (such as leasing or PFI facilities) may have significant revenue implications which have not yet been quantified. It is likely that future accommodation requirements will be met at least in part by way of PFI projects. These could generate additional revenue costs but at this stage there are no specific schemes. It is unlikely that such costs would appear before 2004/05 at the earliest.

Reservation

35. The expenditure projections have been based on the best information available at this stage. It has not been possible to take account of the review of last year's outturn, the line-by-line budget scrutiny, monitoring of performance against this year's budget, results of efficiency and effectiveness reviews, etc. It is not possible either for the forecasts to reflect the current year's planning process which will be steered more effectively by the MPA in its first full year. The estimates for 2002/03 are therefore likely to vary significantly when detailed work is carried out later in the year.

Funding projections

36. Appendix 4 sets out the funding forecasts for the medium term. Up to and including 2003/04 the figures are based on published information contained in the Government's Spending Review 2000, as interpreted by the APA's financial advisers. The projection for 2004/05 is speculative. The assumptions made are set out in the notes to the table see Appendix 3.

37. The grant projections do not assume any distributional changes arising from changes to the allocation formula. As is reported elsewhere on this agenda discussions have recommenced in the Allocation Formula Working Party and it is likely that the moratorium on formula methodology changes will be lifted for 2002/03. In that case it is almost certain that the final tranche of the establishment factor will be eliminated from the formula resulting in a gross loss for the MPA of around £20 million. We will be seeking to mitigate the impact of this loss. Further information will become available in the coming months.

38. The funding projections make no assumption about increases in the council tax precept so that the precept implications of the expenditure forecasts can be presented clearly in the submission to the Mayor.

Overall position

39. The following table compares the expenditure projections see Appendix 2 with the funding projections see Appendix 4 to show the net deficit which would have to be funded from an increased precept. The comparison is shown against both committed expenditure and total expenditure including developments.

40. The estimated loss of grant arising from the removal of the establishment factor in the allocation formula, without any mitigation, would add £20 million to the deficits identified above and require a 6.4 per cent increase in the precept. The precept increase for 2002/03 would therefore be 7.1 per cent to fund committed expenditure and 31.4 per cent if all the developments were met.

C. Financial implications

The forecasts will form the basis of a dialogue with the Mayor which will result in budget guidance for 2002/03.

D. Background papers

None.

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

Appendix 3

Appendix 3: Notes to Appendix 2 is available from the MPA

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