Draft revenue budget 2002/03

Report: 11
Date: 4 October 2001
By: Treasurer

Summary

This report outlines the context for budget setting, identifies changes in assumptions on government grant predictions and the Mayor’s indication of the precept. The committed budget, including efficiency savings, is reviewed and adjustments proposed. Information on development bids will follow in a separate report. A further workshop for Members is proposed to enable a thorough review of the emerging issues before the budget has to be presented to the Mayor.

A. Recommendations

It is recommended that:

1. the Committee considers the context for the 2002/03 budget set out in this report together with the development bids which will be the subject of a separate report in order to advise the member workshop being held on 9 October.

B. Supporting information

Introduction

1. The draft budget for 2002/03 is being produced to a very tight timetable to meet the Mayor’s deadline for its submission. This work is being carried out before the benefits of investment in the Finance Department have been delivered on the ground. At the time of writing this report the MPS Management Board had not completed its consideration of development bids. This report is being circulated without information on proposed developments in order to provide members with as much budget information as possible with the meeting’s agenda. Details of proposed developments with Management Board views will follow. It is therefore essential that there is a further opportunity after the Committee meeting for members to look in detail at the development proposals in the overall budget context. A workshop is being set up for this purpose.

Overview

2. Detailed budget submissions from functional bodies are to be made to the Mayor by 26 October 2001. These submissions will be reviewed with the Mayor in Budget Steering Groups. They will also be scrutinised by the GLA Budget Committee during November.

3. Although the 26 October is the deadline for budget submissions, the budgets themselves will be refined and revised as necessary through a controlled process before they are finally approved in February. Amendments are expected to be made at the following stages:

• Early December - to reflect the Government’s provisional local government settlement and before the Mayor consults on draft component budgets
• Mid January - in the light of responses to consultation.

4. This Committee has already considered the implications of meeting this timetable (Paper FPBV/01/82). The timetable mapping onto the planned Authority and Committee meetings is as follows:

5. The Mayor has agreed an outline statement of his vision for London that provides the framework within which functional bodies are expected to operate. This has six interrelated objectives:

• To develop London as an exemplary sustainable world city
• A prosperous city, in which all share in the benefits of wealth created in London’s dynamic economy
• A city for people; a livable city of safe atteractive streets, where goods and services are within easy reach and where everyone feels safe and secure
• An accessible city with fast efficient and comfortable means of transport, and access to affordable homes, education and training, health, leisure and recreation
• A fair city showing tolerance and abolishing all forms of discrimination, where neighbourhoods and communities have a say in their futures
• A green city

These objectives link into a specific overall objective for the MPA/MPS: to make London a safer City. The MPA are asked to address both the general and specific objectives as far as it is practically possible both in the Business Plan and in the 2002/03 budget.

Business plan

6. The GLA have indicated that to improve the link between business planning and budget processes functional bodies should produce a Business Plan, covering at least the period to 2004/05. This plan should identify the main operational priorities for the period of the plan, list the main performance improvements planned to be achieved by the end of the planning period and provide a comprehensive revised 3 year financial projection, clearly identifying increases in the base budget and major new initiatives (and also identifying any expected changes in the funding base).

7. This information is contained within the emerging corporate strategy, the Policing and Performance Plan and the Medium Term Financial Forecast rather than one overarching Business Plan. At the present moment these documents are in draft form and the Authority will need to ensure that they are sufficiently developed to demonstrate that resources are being properly aligned to the agreed priorities.

MPA/MPS priorities 2002/03 and future years (the Policing and Performance Plan)

8. There is a separate report on the agenda to this Committee on the priorities for 2002/03. The MPS Management Board proposals, including new proposals for non-committed expenditure have been considered where available against a number of criteria. A full exercise has not been possible in the available time and it is proposed that these issues be included in the planned workshop.

Equalities

9. The Mayor has requested specific information on equalities issues to be included with the budget submission. Work is in hand to ensure that this information is available by the time the Authority approves the submission.

2000-01 outturn

10. Included elsewhere on this agenda are the accounts (subject to audit) for 2000-01. They confirm the net overspend position of some £7.9 million reported to the June Meeting of this Committeee (Paper FPBV/01/78). Based on the 2001-02 budget the General Reserve would need replenishing by £6.5 million in order to restore it to the minimum acceptable level of 1% of net budgeted expenditure. This must be a high priority for the Authority.

2001-02 forecasts

11. The paper on revenue budget monitoring presented to the last FPBV Committee identified a possible overspend of £6.1 million (Paper FPBV/01/137), although members were informed that this forecast result was itself assisted by an underspending of £10.1 million on police pensions for which the Committee had indicated a preference that it be added to reserves to enable the Authority to fund higher pension commutation costs forecast for future years.

12. Figures are now available for the period to the end of August 2001 and Appendix 1 sets out the latest comparison of expenditure against budget together with a revised forecast of the outturn for the year. This shows a favourable variance of £5.5 million for the year to date although, as previously reported, this can be largely explained by timing differences against the budget profile.

13. The forecast outturn indicates an overspend for the year of £4.6 million. This is a reduction of £1.5 million from the position reported at the last Committee meeting. Within this movement, some costs have further increased such as Forensic Service charges but these have been more than offset by action taken to contain expenditure and an improvement in the level of income forecast for the year. This reflects positive action taken to ensure costs are recovered wherever possible.

14. It must be stressed that these forecasts were compiled before the events in New York and Washington on 11 September and no account has been taken in this statement of any costs arising. The latest costings suggest these are running at £1 million per week, excluding Special Operations costs. The Authority is urgently seeking an assurance from the Home Secretary that these additional costs which London faces as a capital and international centre will be funded separately.

2002-03 base budget

15. The Medium Term Financial Forecast 2002/05 was reported to the 19 June meeting of this committee (FPBV/01/82) and formed the basis of the original submission to the Mayor. The report incorporated financial projections which detailed the movement from the 2001/02 cash limit of £2,040.1m to a committed budget for 2002/03, net of efficiency savings, of £2,111.9m. The commitments identified at that stage need to be reviewed. However the total of £2,111.9m had been adopted as initial planning guidance in setting business group budget targets for 2002/03.

16. The detailed budget guidance issued to business groups in July and early August allocates the committed budget identified above to individual business groups and also reflects allocations from central budgets as appropriate. In summary, the movement between years is shown in Table 1 below for each business group:

Table 1 - Budget movement by business group

See Appendix 2 for the initial allocation of committed budget items across business groups.

17. Each business group has produced a justification for their 2002/03 base budget, setting out what level of service this funding will enable them to deliver - and what services they may be unable to deliver given this level of resource.

18. These business group justifications in summary form have been subject to a member challenge process, carried out by the chair and deputy chairs of FPBV and supported by other members of the Authority. Appendix 3 contains a summary of the scrutiny process.

Review of the components of the committed budget 2002/03

19. The following paragraphs review the components of the committed budget for 2002/03 as included in the Medium Term Financial Forecasts:

The adjustments identified above reduce the committed budget for 2002/03 as reported in the medium term financial forecasts by £15.3 million, from £2,111.9 million to £2,096.6 million.

Efficiency savings

20. The budget guidance from the GLA requires the MPA to demonstrate that the 2001/02 base budgets have been analysed for savings. This requirement has been met/is being addressed by a combination of:

• a series of specific reviews (undertaken by Accenture)
• the extensive amount of review work carried out on the 2000/01 out-turn (flagged in previous reports to members)
• the Inspectorate report, covering four major areas of spend - police overtime, vehicle hire, DNA/forensic costs and mobile telephone charges, has been considered by Management Board and appropriate structural changes are being developed to align operational and budgetary responsibilities as a key priority
• a review of the structural budget issues around the funding for Specialist Operations has commenced and a detailed analysis is being prepared: Management Board will draw conclusions and report any 2002/03 budgetary implications to members as part of the report to the Committee on 25 October
• Finally, at the time of writing, the external auditors were drafting their initial report flowing from their ‘Regular as Clockwork’ study, which incorporated a review of the underlying reasons for the 2000/01 outturn over-run. It is anticipated that the report will re-iterate the already well-rehearsed concerns around operational and budgetary linkages and the wider cultural issues around financial management in the MPS. Once the report has been formally discussed with officers, it will be circulated to members as an agreed document.

21. The target for cashable efficiency savings for 2002/03 included in the medium term forecasts is £10.6 million (0.5%). This reflects the lower end of the range of potential savings predicted by Accenture in their initial scoping report. Accenture have now commenced work on the first tranche of efficiency and effectiveness reviews. A second tranche of reviews is projected to start in March 2002. There will be limited output from this programme before the 2002/03 budget has to be finalised. However during 2002/03 it should be possible to implement savings arising from both the first and second tranches of the programme. It is suggested therefore that the target for efficiency savings in 2002/03 could be increased, probably doubled to 1% or £21 million.

22. Additional savings have already been identified by the MPS, set out as follows, and it is proposed that these be incorporated into the committed budget in addition to the efficiency savings target.

Adjusted commitment budget

23. The impact on the committed budget for 2002/03 of the proposed adjustments in paragraphs 19-22 above is summarised below.

24. Other adjustments may arise from the continuing review of some of the commitments. Options have also been identified from the above analysis. The maintenance backlog and the purchases which would be covered by the increased de minimis provision need to be considered as development bids. There could also be scope, subject to further information, to limit the price inflation provision.

Reserves

25. The Authority also needs to consider options in the context of the budget in relation to reserves. The most urgent need is to restore the General Reserve to its minimum level of 1% of net expenditure. On the basis of the committed budget this would be £21 million, requiring an increase of £7.5 million. The second requirement would be to increase the earmarked reserve for future police pension commitments. £10 million was included for this purpose under the developments in the medium term submission. There is also a proposal for a building lease dilapidations reserve elsewhere on this agenda. Regardless of any specific budget decisions, the Committee should review reserves policy, taking into account any comments from the external auditor.

Grant funding

26. Grant funding for 2002/03 was projected for the purposes of the medium term financial forecasts. Since then there have been two significant developments as reported to the Committee at its meeting in September. Firstly we have been advised by the APA that more of the national provision for 2002/03 will be ring-fenced by the Home Office than had previously been expected. This could reduce the increase in grant available to police authorities on a general basis to no more than 3.3%, significantly lower than earlier predictions. Whether the additional ring-fencing will generate any extra earmarked funding for the MPA is unclear. Secondly the new data for updating the area cost adjustment is likely to result in a grant loss of £21 million. The following table shows a revision of the previous grant forecasts to reflect these two issues.

27. Representations are being made to the Government in respect of the potential grant loss. There is likely to be a system of floors and ceilings to limit grant losses and gains but no information is available about the levels at which they will be set. It would be unwise at this stage to assume grant receipts higher than £1,777 million but it is probable that the loss due to the area cost adjustment will be abated to some extent in some form.

Precept

28. The Mayor has indicated that his current intentions with regard to the police precept is to provide an inflation increase of 2% and funding for 1,000 additional officers. He has quoted figures which would imply a 9.2% increase in council tax (£10.61 for Band D).

29. The resulting precept income for the MPA would be as follows.

Summary

30. Comparing the adjusted committed budget for 2002/03 with the projected grant, before distributional losses and the precept income reflecting the Mayor’s proposals produces the following:

31. The figure that the Mayor has allowed for 1,000 extra officers (£22.7 million) is a part year cost based on the information supplied in the medium term submission. The Mayor has previously said that additional officers should be engaged on front line crime fighting services. This would clearly include officers in Special Operations as well as Territorial Policing. It will be necessary to review the estimated costs associated with recruiting, training and equipping this number of extra officers in addition to the similar increase in the current year.

32. On the basis of the figure used by the Mayor there is a remaining balance of £15.3 million (£38 - 22.7m). This could be fully offset by grant loss from the area cost adjustment. To the extent that it is not eliminated in this way it is available to meet non-police officer growth.

Conclusions

33. Members will need to consider the development bids in the context set out in this report. That consideration should include issues of particular significance to the Authority, ie reserves. The long term implications of the increased security requirements following the terrorist attacks on New York and Washington will need to be reviewed specifically in the context of potential funding arrangements. The Committee is asked to consider the content of this report and the development bids which will follow and provide advice to the further deliberations in the workshop.

C. Financial implications

As noted in the above report.

D. Background papers

None

E. Contact details

Report author: Peter Martin, MPA.

For information contact:

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

Appendix 3: Scrutiny review meetings

Member scrutiny of MPS budgets has taken place between 4 September and 21 September 2001. The approach taken to the reviews was to emphasise the co-operative, joint working nature of the scrutiny process. This approach was adopted to maximise the benefits for both the MPA and MPS, encouraging openness and innovation and avoiding defensiveness. Four separate scrutiny meetings took place. The Chair and Deputy Chairs of FPBV Committee together with Sir John Quinton, Rachel Whittaker and Jennette Arnold have attended one or more of these scrutiny meetings. The budgets scrutinised covered Transport, Property Services Department, Vehicle Removal, Territorial Policing, Special Operations. Personnel and I.T. Senior MPS and MPA staff were also present. The Treasurer and Director of Resources attended all meetings.

Senior MPS staff provided detailed presentations for the scrutiny meeting. The presentation covered the 2000/01 financial outturn and 2001/02 forecast, budget justification and an analysis of budget pressures. Members undertook a detailed look at the budget lines. Operational performance measures and statistical detail was also provided. A good insight into the preparation for the 2002/03 budget was also afforded.

The following discussion then enabled members to understand the nature of underspending and overspending budget lines. It enabled questioning on how this could be avoided in future years, what was being done to improve forecasting systems, what implications these factors had for MPA finances in 2002/03 and future years. Proposals were made from officers for better ways of managing budgets and in one case a significant restructuring of the budget was proposed (the personnel budget). In all cases officers undertook to provide a thorough explanation which justified the scope and size of their service.

Members of the scrutiny reviews have expressed their thanks to officers who attended and provided a wealth of information, both for the initial presentation and also during the following discussion and debate. This has certainly enabled a clearer understanding of the finances of the areas reviewed. It is however likely to be part of a continuing process to enable members to become fully engaged in detailed scrutiny of the budget. This may well be an issue for discussion at the proposed workshop.

While it is difficult to pick common themes from such a widely diverse group of activities and from such a wide variety of views expressed, these are some initial thoughts:

• the requirement for officers to prepare for these scrutiny meetings had afforded the opportunity for reflection on budgets, a luxury in a demanding job. Innovative ideas and constructive comments were presented;
• many comments were made about structural problems within existing budget; many thought that there were built in overspends - the budget had never caught up with reality;
• there was a genuine enthusiasm for devolved financial management, as long as proper budgets were devolved and appropriate support and training provided in advance;
• there was a feeling that operational efficiency could improve in imaginative ways if there was the opportunity to use savings from a small reduction in police numbers to finance investment elsewhere;
• there were many budgetary pressures over the horizon;
• self-questioning and internal financial scrutiny has been operating; and
• the lack of professional financial support has been recognised as a significant hindrance to improvement.

As the 2002/03 budget process is already underway some of the comments made will be featuring in building up the new budget. High on the agenda for possible action though will be a need to understand the dynamics of the improvements that could be afforded by the release of police ‘numbers’ to finance more efficient ways of operating within existing resources. It is an issue which Territorial Policing in particular see as high on their agenda. This is an issue which clearly the Mayor will need to be appraised, but to do so members need a thorough understanding of the costs and benefits of moving away from headline police numbers. Again it is perhaps an issue for the workshop.

Appendix 4: Budget 2002/03: supplementary table

MPA proposed budget additions

The following development bids have been identified in respect of the MPA's direct activities.

The MPA's detailed budget for 2002/03 will be considered by the Co-ordination and Urgency Committee at its meeting on 6 November 2001.

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