Draft revenue budget 2002/03

Report: 2
Date: 16 October 2001
By: Treasurer and Commissioner

Summary

This report provides the Committee with a detailed analysis of budget proposals and funding for 2002/03 to enable members to determine recommendations to the Authority in respect of the submission to the Mayor due by 26 October 2001.

A. Recommendations

It is recommended that:

1. The Committee consider the options summarised in paragraphs 50-55 and determine their recommendations to the Authority.
2. The Committee note the proposed treatment of certain items outside the budget process (para 43).
3. The Committee note that the result of further work to validate detailed budget figures will be reported to the Committee on 26 November 2001.

B. Supporting information

Introduction

1. At its meeting on 4 October 2001 the Finance Planning and Best Value Committee considered separate reports from the Treasurer and the Commissioner on the 2002/03 budget. A member workshop had been set up for 9 October to allow further consideration on an informal basis. The Committee decided that it should meet again to enable it to make recommendations on the budget to the full meeting of the Authority on 25 October. This meeting has been convened therefore solely for that purpose.

Overview

2. The Authority submitted to the Mayor its medium term financial forecasts, including initial budget figures for 2002/03, on 21 June 2001. A detailed budget submission is due to be delivered to the Mayor by 26 October 2001. This submission will be reviewed with the Mayor and scrutinised by the GLA Budget Committee during November.

3. It will be possible to refine and revise the budget through a controlled process after 26 October before it is 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. The relevant timetable of Authority and Committee meetings is as follows:

Mayoral priorities

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 attractive 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 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 reflect an appropriate alignment of resources and priorities.

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

7. The MPS Management Board, in consultation with the Planning Panel, has been developing priorities and objectives for 2002/03 to be proposed to the Authority. Appendix 1 sets out the latest draft so that the Committee can take them into account in reviewing the budget proposals.

Equalities

8. 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 to be supplied with the budget submission.

2000-01 outturn

9. The outturn for 2000/01 has been reported previously to the Committee. The overspending of £7.9 million has resulted in a reduction in the Authority's general reserve to just £13.5 million.

2001-02 forecasts

10. As reported to the last meeting of the Committee the latest forecast for the current year is for an overspending against budget of £4.6 million. This represents an improvement on the previous month's forecast which was an overspending of £6.1 million. The forecasts do not include the additional security costs being incurred since the terrorist attacks in the USA on 11 September. Those costs are running at approximately £1 million per week. Taken with the existing forecast overspending there is a real risk that the general reserve would be completely exhausted unless additional funding is forthcoming from the Government. Urgent discussions are taking place with the Home Office and the indications are that the exceptional security costs will be the subject of special grant funding although the quantum has not yet been established.

11. The outturn review and the current year's forecasts have been taken into account in assessing the budget requirements for 2002/03.

2002/03 Funding

12. The Authority's budget is inevitably conditioned by decisions about funding which are taken externally, either by the Government in relation to grant funding or by the Mayor and GLA Assembly in terms of the council tax precept. It is therefore appropriate to consider the likely funding for 2002/03 before looking at spending requirements and proposals.

Government grant

13. 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. Informal contacts with the Home Office would appear to confirm this view. Whether the additional ring-fencing will generate any extra earmarked funding for the MPA is unclear but it would be unwise to assume any at this stage.

14. The impact of this downward revision is to reduce the grant forecast by about £20 million compared with that made for the medium term submission, which was the information available to the Mayor when he announced his precept intentions (see paragraph 21 below). This point could be stressed with the Mayor if the Authority wished to argue for a higher precept increase.

15. Secondly the new data for updating the area cost adjustment is likely to result in a grant loss which was originally exemplified by the Home Office at £21 million. More recent information suggests that the potential loss is probably no more than £15 million. The following table shows a revision of the previous grant forecasts to reflect these two issues.

16. Representations are being made to the Government in respect of the potential grant shortfall. 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. The loss from the area cost adjustment may be abated in practice. For the immediate purpose of determining the MPA budget submission it is proposed to set this issue on one side on the basis that the Mayor will have to consider the eventual outcome in the context of his overall precept plans. For information a grant loss of £15 million is equivalent to a precept increase of 4.8%.

17. The amount included in the grant forecast for the Crime Fighting Fund (CFF) represents the full year cost of officers recruited under that programme by the end of the current financial year (1,362 estimated) and the part year cost of a further 682 officers due to be recruited in 2002/03.

18. The Pay Lead Grant has been estimated on the basis of meeting 75% of the cost of the increased pay lead for all post-Sheehy officers, excluding the associated employers national insurance contributions. There is a continuing dialogue with the Home Office on the unsatisfactory nature of these arrangements.

19. The DNA grant reflects the total government funding currently anticipated for this purpose. The funding has to be matched by an equivalent amount of expenditure. This figure is under review and it may therefore be necessary to make consequential changes.

20. The Government's decisions on grant distribution for 2002/03 should be announced at the end of November, although there may be some earlier indications. The Authority will be able to review the impact of any significant differences from our forecasts at its meeting on 10 December, before the Mayor determines the police component budget for the purposes of consultation.

Precept

21. The Mayor has indicated to the GLA Budget Committee that his current intentions with regard to the police precept are to provide an inflation increase of 2% and funding for 1,000 additional officers. Any other increases would have to be contained within savings. He has quoted figures which would imply a 9.2% increase in council tax (£10.61 for Band D).

22. It might appear that additional officers are being funded twice, through the CFF and the Mayor's precept proposals. However the CFF is being found within the overall national provision for police resources. It therefore acts as a top slice which limits the grant funding available for policing costs generally. Furthermore the CFF does not guarantee a net increase in police officers and at current rates of wastage it would be wholly absorbed financing recruits to maintain the current strength. In practice we have treated CFF as part of the total grant funding for the budget. Without a commitment from the Mayor to raise precept income for this purpose it is unlikely that a net increase of 1,000 officers would materialise.

23. The precept income for the MPA resulting from the Mayor's stated intentions would be as follows.

Total funding

24. On the basis of the latest grant forecasts and the Mayor's stated intentions total funding for the 2002/03 budget would be £2,119.6 million (£1,776.7m grant plus £342.9m precept) ignoring any loss arising from the area cost adjustment. Expenditure proposals and the detailed budget submission need to be considered in this context.

2002/03 Budget

25. Initial expenditure estimates for 2002/03 were included in the medium term forecasts submitted to the Mayor in June. It is essential to maintain a clear audit trail from those figures in developing the detailed budget submission. Variations are explained at appropriate points in the following paragraphs and summarised in Appendix 2.

26. The budget proposals are set out over the following headings which are explained in the subsequent paragraphs. Details are contained in the various appendices.

• 2001/02 approved budget
• provision for inflation
• unavoidable commitments
• other commitments
• provision for 1,000 additional officers
• development bids
• savings

2001/02 Budget

27. The approved budget for the current year, £2,040.1 million including expenditure funded by earmarked grants, is the starting point for developing the proposed budget for 2002/03. Members will recall that the 2001/02 budget represented an increase of 10.8% over the previous year. New growth was included for 1,050 officers, to address civil staff recruitment and retention and for IT developments as well as for police operational improvements.

28. The Government has now passed legislation which ends the current requirement for police authorities to pay levies to the National Crime Squad (NCS) and the National Criminal Intelligence Service (NCIS). Deletion of the levies reduces the budget base by £35.9 million. The same reduction has been made to the grant forecast.

Provision for inflation

29. The June submission assumed pay awards at 3% in line with the provision in the 2001/02 budget. However the awards agreed for police officers, from September 2001, and for civil staff, from August 2001, represented 3.5% increases the full year effect of which will fall into 2002/03. The assumption for next year's budget has therefore been revised upwards to 3.5%. This increases the inflation provision by £4.3 million by comparison with the medium term forecast. The total provision for pay and price increases included in the draft budget is therefore £57.1 million.

30. Within the total inflation provision there is £7.3 million for prices. Some price increases are unavoidable and cannot readily be absorbed, e.g. rent increases and price increase clauses in long term contracts. In view of the fact that savings have been made against the price inflation provision in the current year work is being undertaken to validate this provision before the budget is finally approved.

Commitments

31. A general definition of budget commitments would be 'unavoidable additional expenditure and/or expenditure necessary to maintain current service provision and policies'. Expenditure commitments can arise for a number of reasons. Some are absolutely unavoidable and will be incurred regardless of anything the Authority may do. If specific funding is not provided in respect of such items then a corresponding reduction will have to be found elsewhere in the budget in order to keep total expenditure within the fixed cash limit.

32. Unavoidable commitments may arise in the following ways.

• Full year cost of expenditure incurred in the previous year
• Contractual commitments
• Revenue implications of capital schemes commenced by the beginning of the budget year
• Unavoidable expenditure arising from past decisions
• Expenditure committed by external decisions/events which have already occurred or will occur before the end of the budget period.

33. There are other categories of future expenditure which have a degree of commitment but where there also remains an element of choice. A decision can be taken to avoid the commitment or to limit its financial impact. Three particular categories have been identified.

• Legislative requirements. In practice the response to new legislation can often be flexible in terms of the amount of resource to be applied
• Unbudgeted current service provision. Decisions taken outside the proper budget process cannot be assumed to commit future funding. There is always the option to reduce service provision. Effective budget management and control should eliminate this
• Agreed policies not yet implemented and/or quantified. There may still be options as to whether the policy is actually implemented and as to the cost of implementation.

34. These definitions have been used to refine the presentation of commitments in order to assist decisions about their treatment within the current budget process.

Unavoidable commitments

35. Appendix 3 (see Supporting material) sets out the unavoidable commitments that have been identified for next year's budget. They total £69.32 million, of which £48.50 million is shown as having been included in the medium term forecasts. However the item shown as 'DoI capital programme – revenue costs for projects entering service' (£11.74 million) effectively replaces the provision for £12 million of de minimis capital expenditure included in the medium term submission. Therefore £60.24 million was actually reflected in the medium term forecasts.

Other commitments

36. Appendix 4 (see Supporting material) sets out commitments where there is a degree of choice over their inclusion in the budget in part or not at all. However if they are not to be fully recognised in the budget the consequential actions need to be clearly identified. Thus if unbudgeted service provision is not to be reflected in the budget then action has to be taken to reduce service activity so that expenditure is contained within budget.

37. The list of other commitments which are not wholly unavoidable totals £38.60 million. The major single item is a further £15 million estimated to be required to implement the Hay review of civil staff pay. This is on top of a provision in the 2001/02 budget totalling £22.2 million of which £9 million has so far been utilised to fund the increase in London location allowances. The MPA has a policy commitment to improve civil staff pay in order to address the recruitment and retention issues. However there remain choices for the Authority as to how the policy is implemented and at what cost.

38. Also included in this category is £7.5 million to bring the general reserve back to 1% of budget requirement in accordance with the Authority's policy. In view of the tightness of the budget position no provision is proposed to establish further earmarked reserves for future police pension liabilities although a provisional policy to do this was agreed by the Committee earlier in the year.

Additional officers

39. The Mayor has made clear that he is prepared to increase the police precept to fund 1,000 extra officers. The amount which he has quoted for this purpose is £22.7 million which represents a half year cost of 1,000 new officers together with the cost of recruit training and provision of personal equipment. However the impact on MPS costs of what would be an increase in officers in excess of 2,000 over two years is more complex than that. There are additional costs to sustain the recruitment and training activity itself and there are knock-on effects on the cost of other operational policing support, e.g. vehicles, accommodation, ongoing training needs etc.

40. There is a question about the deployment of additional officers. The Mayor has referred to front line policing and is also concerned to ensure visibility through allocation of officers to boroughs. However there are identified pressures for more officers particularly in Specialist Operations but also in direct support of the recruitment and training activity which represent a demand on the 1,000 officers. Needs have been identified for around 200 posts in these areas and the Authority will have to decide whether it will make a case to the Mayor for these front line policing requirements to be met out of the provision for additional officers whilst still leaving the majority of new recruits for allocation to boroughs. If this approach is accepted there are also further support costs which ought to be met if the officers are to be fully effective.

41. Further work is needed to justify and quantify the potential additional costs associated with the significant increase in police officers. Initial broad estimates of the costs arising directly from consecutive cohorts of 1,000 new officers suggest a figure of £30 million (£50 million in a full year) should be provided in the 2002/03 budget, and if the increase in officers enables the particular pressure areas to be addressed a further £2.25 million (£4.5 million in a full year) would be required. It is suggested that the Mayor should be asked to revise his precept calculations to reflect these estimates of the cost of 1,000 additional officers.

Development bids

42. There are further development proposals which are not committed and these are listed in Appendix 5 (see Supporting material). They total £21.25 million.

Excluded items

43. Members should be aware that a number of items have not been brought forward for inclusion in the budget figures. These are briefly described below.

• The MPS is reviewing the ongoing impact on policing requirements arising from the new terrorist threat. Proposals will be the subject of discussion with the Home Office with the intention of securing specific funding if the need is justified.
• It is expected that there will be extraordinary policing requirements in London next year as a result of the celebrations for the Queen's Golden Jubilee. The initial estimate of policing costs is £13 million and this will also be the subject of a direct approach to the Home Office to seek special grant funding.
• There are ongoing discussions with TfL regarding traffic enforcement to secure safer routes in the capital. It is expected that the full costs will be borne by TfL but to the extent that the proposals require the deployment of police officers there is a potential linkage with the recruitment of additional officers.

Savings

44. The medium term financial forecasts included efficiency savings at a rate of 0.5% per year. Efficiency savings were originally included at a similar level in the 2001/02 budget but the requirement was increased to 1% by the GLA Assembly. In practice it has not proved possible to find true cashable efficiency savings to meet that target. The efficiency and effectiveness review programme is now underway but many of the areas being examined are currently overspending and there is a question as to how far the consultants' proposals will be able to impact on the budget as opposed to just limiting the overspending.

45. It is apparent that the area of the budget where cashable efficiencies can be secured is relatively limited. Police officer numbers cannot be reduced and this means that it is not possible to cash savings against police pay which alone accounts for 50% of the budget. Pensions in payment clearly cannot be reduced. There are long term contracts covering substantial support services where there is no prospect of immediate savings. Expressed against the budgets where savings could be possible an overall 0.5% target actually becomes a requirement of around 2%.

46. It should not be forgotten either that the MPS has made and is continuing to make non-cashable efficiencies, or opportunity savings. These are about improving productivity of police officers but without a cash benefit for the budget. In successive efficiency plans HMIC has validated about £70 million savings of this nature.

47. An increase in the efficiency savings target beyond the current 0.5% would probably lead to straightforward budget reductions, or cuts, rather than genuine efficiency savings. Such reductions should be clearly identified as part of the budget process if the Authority's very limited reserves are not to be put at further risk.

48. Some savings have already been identified in the budget development as shown below.

49. At its meeting in March 2001 the Authority agreed the creation of a contingency of £5 million under its direct control. Full year costs of the restructuring of the MPS Finance Department have been committed against this leaving a balance in the base for next year of £3.5 million. This could be given up to support the budget generally.

Overall position

The following table combines the various potential budget elements to produce a range of budget totals.

(1) The figure underlying the Mayor's precept calculations has been used here on the basis that the higher costs quoted in paragraph 41 above would have to be matched by an increase in the proposed precept. The comparisons in paragraph 52 below continue to assume the mayor's precept intentions on the basis which he announced.

50. Column 1 of the table shows the cumulative impact of all the budget bids. Column 2 shows the effect of incorporating all the commitments and the additional 1,000 officers together with different savings targets. Finally column 3 includes the unavoidable commitments only and the 1,000 officers with the savings targets.

51. These indicative totals need to be set against the projected funding so that the consequences of setting the budget at a particular level can be assessed. At this stage the Mayor's current intentions have to be taken as indicating the most likely funding level. The following table therefore compares the various budget totals against that level of funding and identifies the implications.

52. It should be appreciated that each of options 3, 4 and 5 already includes unidentified efficiency savings and/or budget reductions of 1% of total budget (£21 million). In order to bring each option into line with the Mayor's funding proposal those savings would have to be increased by the amount of the deficit shown in the final column. Thus option 3 which only includes unavoidable commitments would require total savings not yet identified of £29.5 million. Option 4 which includes all commitments would require savings of £68 million.

53. The options available to members can be summarised as follows:

submit a budget proposal below the Mayor's intentions, e.g. at a 5% precept increase. This would require savings of £42.8 million to be identified to offset unavoidable expenditure increases.

submit a budget proposal in line with the Mayor's intentions recognising that this would require minimum savings of £29.5 million to be identified to fund unavoidable commitments. This requirement would increase to fund any other commitments members wished to include in the budget.

as above but argue for an increase in the Mayor's calculation of requirements for 1,000 additional officers

press the Mayor to increase the precept beyond his current intentions to allow some or all of the identified commitments to be included in the budget without offsetting savings.

54. At whatever level members choose to submit the budget the Mayor should also be informed of key items that cannot be included in the budget.

55. In the time available it has not been possible to complete the detailed work to validate all the figures presented in this report. Depending on members' decisions it is likely that there will be a requirement to identify further savings. It is proposed that there should be a further report to the Committee on 26 November 2001 to finalise the detailed content of the budget submitted pending consideration of the implications of the local government finance settlement.

C. Financial implications

As noted in the above report.

D. Background papers

None.

E. Contact details

Report author: the author of this report is Peter Martin, MPA.

For information contact:

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

Appendix 1: Priorities and objectives proposed by the MPS

Proposed priorities

In this context a priority is an issue singled out to receive additional managerial focus, work-effort and/or resources with the intention of bringing about a significant change or improvement.

Four priorities are proposed:

1. To increase the security of the capital;
2. To create safer communities for Londoners;
3. To improve the police response to vulnerable victims;
4. To tackle youth offending.

Proposed objectives

In this context an objective describes how the priority will be addressed (ie what will actually be done in practice). Good practice states that an objective should be SMART (specific, measurable, achievable, relevant and time-based).

Work to develop appropriate objectives is ongoing and so the objectives shown under each heading below should be viewed as purely provisional. The overall number of objectives may need to be reduced to attain the agreed aim of a smaller number of priorities, objectives and targets compared to 2000/01.

Priority 1: To increase the security of the capital

Increase the security of the capital against terrorism

1. To ensure operational officers are given appropriate briefing and training on terrorism
2. To achieve an efficient response to suspected and actual improvised explosive devices
3. To use public relations effectively to inform the public about what we are doing re: terrorism and why

Enhance our visible patrol service for London's communities

4. To increase the public's satisfaction with visible police presence
5. To increase the number of police volunteers (MSC and others)
6. To introduce the police wardens schemes

Priority 2: To create safer communities for Londoners

This will include a 'bottom up' approach to setting bespoke targets negotiated with partners within local crime and disorder strategies.

7. To reduce the fear of crime
8. To improve safety on London's transport routes

Make London's streets safer by tackling street and violent crime

9. To reduce violent crime in which offensive weapons or bladed instruments are involved
10. To reverse the trend in gun related violent crime
11. To reverse the trend in assaults in the streets
12. To reverse the trend in street crime

Disrupt London's drugs markets

13. To target street suppliers of Class A and Class B drugs
14. To continue our commitment to introduce users to effective treatment
15. To work with partners to reduce the demand for drugs in our communities

Priority 3: To improve the police response to vulnerable victims

16. Respond positively to/deliver recommendations from HMI and Ministerial Inquiry into child protection issues
17. To investigate racist incidents and racist crimes to the satisfaction of victims (includes faith groups)
18. To investigate homophobic crimes to the satisfaction of victims
19. To investigate domestic violence to the satisfaction of victims
20. To improve victim care and investigation in cases of rape

Priority 4: To tackle youth offending

Work in partnership to reduce the number of crimes committed by youths

21. To improve confidence of youths to report victimisation
22. To contribute to early intervention schemes to reduce youth entry into criminality
23. To reduce re-offending by Persistent Young Offenders.

Appendix 2: Summary of changes to the medium term financial forecast

Send an e-mail linking to this page

Feedback