Revenue budget monitoring 2001/02

(including budget implementation update)

Report: 8
Date: 14 September 2001
By: Treasurer and Commissioner

Summary

This paper provides a summary of the Revenue Budget position as at 31 July together with a commentary on the main budgetary issues and issues impacting on the year end outturn. An indication of the outturn is included. It also provides an update on the efficiency savings target and the implementation of the budget priorities.

A. Recommendations

The Committee is asked to:

1. Note the financial position as set out in the appendices 1 and 2 and the explanations set out in paragraphs 7 and 8.
2. Note the actions that have taken place since the July Committee with regard to improving financial management and control within the MPS set out in paragraphs 11, 12, 13 and 14.
3. Note the update on the budget priorities as set out in paragraphs 15 to 19.
4. Accept the proposal to offset £3.1 million of general inflation and £2.5 million of newly approved grant income relating to DNA support against the efficiency savings target for 2001/02 (paragraph 22 refers).
5. Approve the budget virements in respect of the above proposal and that in respect of the part year investment in the Finance function of £900,000 (paragraph 24 refers).
6. Consider requesting the Committee Chair and/or Chair of the Authority to formally engage with the Home Office regarding the shortfall in funding due to the decision not to fund the ERNIC element of the London Pay Lead.

Supporting information

Introduction

1. The first budget monitoring report for 2001/02 was submitted to Members in July dealing with the position as at 30 June 2001. This report updates the position to 31 July and provides a further commentary on budget issues. The report also takes account of the budget pressures identified and considers the year end position.

2. Appendices setting out summaries of the financial position similar to those submitted with the July report are attached for information. Appendix 1 summarises the year to date position for the 31 July. Appendix 2(a) to 2(f) sets out the year to date figures for each Business Group individually together with an overall summary (Appendix 2). The overall summary includes a forecast position for the authority.

3. The overall year to date position shows only a marginal variation over the budget of £250,000. This compares with a favourable variance of £8 million at the end of June. It must be stressed, however, that expenditure patterns do vary every year and budget profiles are not exact in matching budget with expenditure every month. Adjustments have been made to allow for items where significant accruals are required to bring expenditure into account in the appropriate month. There are nevertheless, significant items of both under and over expenditure within the overall position.

4. To improve the financial information, all command units and departments have submitted forecasts of the likely outturn for their budget centre. This is the first time that forecasts have been obtained from the entire organisation this early in the financial year. However due to the pressures on the finance function including the close and review of the 2000/01 financial year and the 2002/03 budget preparation work, time has not been available to complete the rigorous corporate scrutiny that is required for these forecasts.

5. Forecasts will now be produced every month and should improve as experience and expertise is developed. The additional staff being recruited for Finance will also be able to strengthen this function. It is intended that these forecasts will be summarised by Business Group for presentation to the Committee. They will be circulated to all members of the Committee as soon as they are available and can be discussed at the next subsequent meeting. As indicated in paragraph 4 however, the existing forecasts are not sufficiently robust to form the basis of this report by themselves.

6. Notwithstanding the qualifications above, there are various identifiable pressures in the budget which allow a forecast to be produced at the corporate level (contained in appendix 2) that confirm the trend of a potential overspend of £6.1m. Further comments on the major variances in the budget reports are set out below and the approach being adopted by MPS Senior Management as result of this forecast result is set out in paragraphs 12, 13 and 14.

7.1 Police pay

The year to date position shows an overall overspend of £5.2 million. Within this total there are some structural elements that impact on the distribution of the overspend. A faster than expected staff turnover rate offset by increased recruitment results in an overspend in Personnel Holding Branch as more recruits pass through the training programme. This is balanced by underspends principally in Territorial Policing. The higher costs of officers in SO as reported at the July Committee continues to reflect in the outturn for this Business Group.

The current trend indicates a potential overspend by the year-end. Various issues contribute to this. Firstly, a vacancy factor of 1% was allowed for in the original budget in line with previous years. If the target number of police officers is achieved this vacancy factor will be eliminated leaving the police pay budget overspent by up to 1%. The pay award allowed for police officers in the budget was 3% whereas the actual award from September 2001 was 3.5%. There has also been a settlement of certain pay anomalies in respect of married couples housing allowances that has added over £3m to costs without any budget provision. Allowance also needs to be made for the tax liability in respect of free travel, estimated at £1.1m, that was not funded in the budget.

All of these factors represent a cost of approximately £13 million in excess of budget provision. Some benefit will be obtained from a later phasing of the recruitment of additional police officers. Whilst the analysis of the impact of this later planning has not yet been completed to identify the actual savings from the centrally held budget for the additional officers, indicatively it will be at least sufficient to fund the Mill Hill accommodation development approved at the July Committee.

Another possible offset to the increased costs impacting on the pay budget is that the increase in the rate of staff turnover with more leavers replaced by increased recruitment should have the effect of reducing the average cost of a Police Officer as younger officers are employed. This situation will continue to be monitored throughout the year.

The forecast for police pay is an overspend of £23m. In addition to the budget pressures described above, the forecast also includes the pay element of the additional 1050 officers being recruited this year. This element of overspend is compensated for in the significant favourable variance in the centrally held budgets (see paragraph 8.1).

7.2. Civil staff pay

Civil staff pay continues to show an underspend against budget. The underspend is also higher than reflected in the budget line on the statement because the provision for the increase in location allowances is still held centrally. Allocation of this budget provision would increase the underspend by £2.8 million to £5.6 million. No account has been taken of the provision for implementation of the Hay Review so that the budget for this remains in the Centrally Held funds. If this is implemented later in the year there is likely to be an impact on Civil Staff pay budgets as recruitment improves. However the effect in 2001/02 will be limited and an under spend of about £7 million would appear likely at this stage.

7.3. Police overtime

Police Overtime continues to show a significant trend of expenditure over budget. The month 4 position shows an overspend of £7.4 million and this clearly excludes the additional costs incurred in policing the Notting Hill Carnival. To some extent this reflects the underspends in Police Pay currently apparent in Territorial Policing but overall is clearly running significantly ahead of the budget. On current trends, an overspend of up to £28 million in overtime would materialise this year.

The Committee will be aware of the continuing high level of demands being made of the MPS, and in many of the specialist squads in particular. Significant increases in gun related crime and homicide (including Operation Trident) combined with terrorist activity with implications for protection and security have all contributed to budget pressure.

7.4. Pensions

The trend of underspending against this budget has continued in this period with the variance on the police pension budget standing at £6 million. Current advice from Personnel is that the rate of underspending is likely to slow during the year and a forecast of the outturn indicates a saving of £10.1 million. Members have previously indicated that any saving should be held to finance future peaks in pensions costs. The position on pensions costs clearly needs to be monitored and kept under regular review.

7.5. Business group running expenses

The current report shows an underspending of £1.17 million to the end of July. This is, however, likely to result from the profiling pattern and is not forecast to result in a saving by the year-end. In fact forecasts from the business groups indicate an overspend of over £4.5 million. Whilst rigorous review of these forecasts has not been completed it is prudent to include this pessimistic view.

7.6. Employee related expenditure

Expenditure to date on this shows a net underspending of £3.15 million and the current forecast is for this level of saving to be maintained as the outturn position. Savings have been identified in the budgets for Positive Action, Recruitment Advertising and Civil Staff premature retirement and redundancy costs. The cost of recruitment advertising has been reduced as a result of the Home Office campaign, which has complemented the local MPS recruitment drive.

7.7. Premises costs

The expenditure to July shows an overspend against the budget of £4.9 million. This is, however, a profiling issue as expenditure has been incurred earlier than anticipated in the budget. The Year-end position is forecast to be down to £0.5 million over budget.

7.8. Transport costs

Expenditure on transport is currently in line with the budget but additional costs of £1.5 million are anticipated as a result of the decision made at the last Committee in relation to payments under the vehicle maintenance contract. There are, however, potential savings from improved management of vehicle repairs and maintenance costs that may absorb an element of this increased expenditure.

7.9. Supplies and services

The current position shows an underspend of £0.5 million. Within this however, there are a number of pressures to be addressed including Forensic Medical Examiners fees and Interpreters fees which are currently forecast to overspend by a combined total of £4.4 million and the preliminary estimate of cost for this year of vehicle removals, following the failing of the arrangement with Bells, of at least £1.5m. The overall budget for Supplies and Services is currently being reviewed to identify savings in expenditure that can be made on other line items within this budget heading. However again it is prudent to report a worse case position. On a positive note the compensation claims budget is forecast to underspend by £2.5m.

8.1. Centrally held

At the end of month 4 £2.8m of the budget for improving civil staff pay had been committed arising from the increase to location allowances. The significant underspend forecast for the year-end is a reflection that the expenditure for much of the centrally held budgets - additional officer numbers, inflation, and location allowances have been reflected in the forecasts of specific expenditure lines (in particular police pay and civil staff pay).

8.2. Business group income

Business Group income is currently showing a favourable variance of £1.9 million. Some of this reflects income that offsets expenditure included in budget lines showing an overspend. Some net benefit is, however, anticipated for the full year outturn.

8.3. Service wide income

The current adverse variance of £2.4 million includes a reduction of interest receipts arising from the reduction in interest rates and the worsening of the payment profile of Section 102 Grant income. This is still forecast to result in a reduction in income for the year of £2 million although further reductions in interest rates would increase that total. Other income budgets should, however be achieved.

8.4. Funding

Again in this year we have been informed by the Home Office that they continue to refuse to pay the employer related National Insurance contribution in respect of the London Pay Lead. This will result in a £2 million shortfall in budgeted funding this year. This is an issue which members may wish to progress with the Home Office directly together with concerns about next year’s grant funding (see item 9 on this agenda).

Overview of budget position

9. Although the quality of the forecasting still needs substantial improvement the projected overspending of £6.1m is the best available prediction for the year end position before positive management action is taken to restrict expenditure.

10. Members will appreciate that the forecast result is itself assisted by an underspending of £10.1m on police pensions for which the Committee has already indicated a preference that it be added to reserves to enable the Authority to fund higher pension commutation costs forecast for future years.

11. Furthermore the Authority will wish to restore its general reserve to 1% of net expenditure in line with the agreed policy. In order for this to be achieved in the current year the final outturn would have to be an underspending of £6.5million. The Authority would clearly want to make progress in establishing reserves in accordance with its policies as soon as possible. An overspending against the budget will severely hamper achievement of this objective.

12. The Management Board are keeping the position under close review and are stressing the need for all Business Groups to contain expenditure within budget. The Board have stated their intention to balance the budget corporately but are aware that to stay within budget may require local priorities to be overridden or operational matters to be detrimentally impacted. However it is recognised that the MPS needs to continue to stabilise and improve the financial position before continuing with planned devolution.

13. Since the July Committee, a number of actions have taken place. Firstly far more detailed financial management information is produced for the Management Board with details of the financial performance of all areas of the MPS. These are consolidations of information that is available to all OCUs/Departments within the organisation through the corporate finance system.

14. Secondly, there has been marked success in recruiting to the more senior positions in the new finance structure and at the time of this Committee there will be more selection interviews occurring to populate the structure lower down. There will still be capacity and skills issues to be dealt with until the new recruits arrive during the third quarter but we are attracting high calibre individuals.

15. Thirdly the Commissioner has called for the immediate creation of a Budget ‘Star Chamber’ Group empowered specifically to bring the corporate budget position into balance. It is chaired by the Director of Resources and has a membership of Management Board members and appropriate business and operational representatives. It will have met twice by the time this Committee meets. The key short-term task is to identify and secure existing underspends and identify savings which can offset budget pressures caused by operational or unforseen occurrences.

Budget priorities

16. The 2001/02 Budget Implementation report submitted to the 19 June FPBV Committee stated that from July reporting the three major budget priorities would be carried out as part of the routine financial monitoring mechanism.

17. Police Officer Recruitment and Retention: Detailed reports on recruitment and retention issues are regularly submitted to the Human Resources Committee. Table 1 below sets out MPS performance on police recruitment and wastage:

Table 1 - Performance on police officer recruitment & retention

18. Civil Staff Pay Measures: The financial statements explained above include allowances for the financial impact of the increases to Civil Staff Location Allowance. There is not yet any firm indications of the financial impact the Hay Review of civil staff pay and grading may have in 2001/02.

19. The downward trend in the numbers of police officers occupying designated civil staff posts is continuing as demonstrated in Table 2.

Table 2 - Police officers in designated civil staff posts

20. Information Technology Programme: attached as Appendix 3 is a schedule of the projects in the IT programme with comments as to where they are in the development and implementation cycle as at July 2001.

21. As previously reported to the Committee, the efficiency savings to be identified during the year totalled £13.6 million. £5 million was allocated on the basis of £1 million to each of the five MPS Business Groups. Current progress on identifying these savings is as follows.

22. The Deputy Commissioner’s Command will obtain the savings primarily by managing civil staff vacancies. The Resources Business Group has identified savings in property maintenance and cleaning costs and reduced costs of vehicle accident damage. The other Business Groups, Territorial Policing, Special Operations and Personnel will achieve the savings by cash limiting budgets under their control.

23. Consideration was given at the last meeting for a contribution to the savings required to balance the budget to be made by limiting the centrally held inflation provision by £3.1 million and by £2.5 million from the Home Office DNA expansion budget . This would meet £5.6 million of the £8.6 not yet identified. Members agreed to review the position in the light of this report and it is recommended that approval is now given for these sums to be applied to assist in meeting budget requirements.

24. The balance of £3 million remains under review but no specific proposals have yet been identified to meet this requirement.

25. In addition to the proposals in paragraph 22 authorisation is sought from the Committee to transfer £900,00 from the MPA contingency to fund the past year effect of the investment in the finance function.

C. Financial implications

There are no financial implications arising directly from this paper.

D. Background papers

Existing Committee reports referred to above

E. Contact details

The author of this report is Bob Alexander Head of Finance, MPS.

For information contact:

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

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