Revenue budget 2002/03

Report: 10
Date: 6 December 2001
By: Treasurer and Commissioner

Summary

The Authority's draft budget for 2002/03 was submitted to the Mayor following the last meeting of the Authority on 25 October 2001. This report updates the position and seeks final approvals before the Mayor goes out to consultation on his budget proposals. The report has been written BEFORE the announcement of the grant settlement for next year and an oral update will be provided for the Finance Planning and Best Value Committee. 

The report sets out the latest position on provision of additional officers in 2002/03 and the costs associated with a further significant increase in officer numbers. 

Necessary adjustments to the draft budget have increased the savings target. Substantial savings have been identified but it is likely, subject to the grant position and member consideration that there will remain a gap between budgeted net expenditure and expected funding which will have to be addressed at the next meeting of the Committee on 17 January 2002.

A. Recommendations

It is recommended that:

1. The Committee/Authority receive an urgent report on the implications of the grant settlement
2. Members agree the basis on which to present the costs associated with recruitment of a further substantial number of police officers.
3. Members note the adjustments to the draft budget figures (paragraphs 8 and 23-27) including the elimination of the vacancy factor in the police pay budget and consider whether the issue of the vacancy factor should be raised with the Mayor in the context of the precept.
4. Consider and agree/modify the savings proposals (Appendix 4).
5. The Committee agree recommendations to the Authority for approval of additional expenditure funded by savings.
6. The Committee note the shortfall of identified savings at this stage and agree that proposals to close the gap be considered at the Committee's next meeting on 17 January 2002.
7. The Committee receive a future report about budget management arrangements for 2002/03.

B. Supporting information

2002/03 budget submission

1. At its meeting on 25 October 2001 the Authority considered the recommendations from the Finance Planning and Best Value Committee of 16 October and agreed the following resolutions for the submission of the draft revenue budget for 2002/03.

• Note the recommendations of Finance Planning and Best Value Committee
• Agree the submission to the Mayor along the following lines:
  1. Agree the inflation provision to reflect 3.5% pay awards (£57.1m)
  2. Provisionally include all unavoidable expenditure increases (£69.3m)
  3. Include provision of £22.7m for 1,000 additional officers, but reassess and discuss with the Mayor, on the basis of evidence to be presented to him, by how much he would increase the precept to cover costs not reflected in the £22.7m provision. The budget to be increased by the amount agreed with the Mayor to reflect the cost of 1,000 officers or the number of officers be reduced if the provision cannot be increased.
  4. Include savings, still to be identified, at the level required to reduce the budget to a level consistent with the Mayor's precept proposals (£29.5m).
  5. Indicate further expenditure proposals as recommended by Finance Planning and Best Value Committee (totalling £21.3m) which would be included if further savings can be identified.
• Require proposals to achieve the required savings of £29.5m initially and up to a further £21.3m to be reported to Finance Planning and Best Value Committee on 26 November (and MPA on 10 December), so that the Authority can then decide what level of savings is feasible for 2002/03 and inform the Mayor accordingly.
• Review the submission on 10 December in the light of the grant settlement and any other later information.

2. The resulting submission can be summarised as follows:

3. The unavoidable expenditure commitments are set out in Appendix 1. Appendix 2 lists the expenditure increases, totalling £21.3 million, recommended for inclusion by the Finance Planning and Best Value Committee but which the Authority set on one side pending identification of sufficient savings to fund them, in full or in part.

4. The MPS Star Chamber has continued to meet on a weekly basis to coordinate actions both to ensure that expenditure in the current year is contained within budget and to balance the budget for next year. The MPA Chair's Budget Group has also been meeting weekly to oversee and guide the work particularly in relation to the 2002/03 budget.

Outstanding issues

5. A number of issues remained outstanding following the submission of the draft budget to the Mayor and these are considered in turn in the following paragraphs.

• The impact on the grant forecast of the 2002/03 grant settlement.
• The implications of the Government's decision with regard to the counter-terrorism bid.
• Reassessment of the provision for additional officers to ensure that the financial provision fully supports the number of extra officers to be recruited.
• Review of the assumptions underlying the unavoidable expenditure increases.
• The identification of savings to balance the budget.
• The net result of the foregoing factors and the implications for the expenditure proposals not yet included in the budget.

Grant settlement

6. The 2002/03 provisional grant settlement was due to be announced on 29 November 2001. However two days before that date the Government deferred the announcement until 4 December. This is clearly too late for details to be incorporated in this report and an oral update will be provided to the Finance Planning and Best Value Committee and information circulated to all Authority members as soon as possible.

7. One matter in relation to funding has been clarified in that the Mayor has indicated that he will not expect the MPA to make savings to offset grant loss arising from the updating of the area cost adjustment. He has also made clear that the Authority will not have to make savings to cover any council tax benefit subsidy to be met in the precept.

8. One element of our grant forecast has already been revised downwards in respect of DNA funding. The assumption that the increased expenditure on DNA testing would be fully covered by additional Government funding has been proved to have been wrong. Forecast grant income has therefore been reduced by £9.6 million.

9. The Authority has just been offered the opportunity of receiving Crime Fighting Fund (CFF) money early. This has been made possible because of the success in achieving recruitment targets in the current year. The implications of this are being assessed but it should result in an increase in the total CFF funding available to support the 2002/03 budget.

Counter-terrorism funding bid

10. The Government has agreed special funding of £22 million towards the counter-terrorism activity since 11 September to the end of this financial year. The estimated additional costs included in the submission for this period were £25 million and it should therefore be possible to manage actual costs at or close to the government funding.

11. No announcement has yet been made in relation to counter-terrorism costs beyond the current year. It is not clear when a decision will be made on that part of the submission for special funding and, an oral update will be provided. The submission included justification for up to a further 800 officer posts.

TfL

12. TfL have proposed a significant enhancement to the policing of priority transport corridors in London. The costs would be borne by TfL but the service would be provided under a service level agreement by the MPS. The current estimate of the cost is £25 million per year. This would have no financial impact on the MPA's budget. However the proposals do entail the employment of around 250 officers who would represent a further addition to the MPS police officer strength.

Total additional officer numbers

13. Additional officers could therefore arrive in 2002/03 potentially from three sources:

• The counter-terrorism bid, up to 800.
• TfL, around 250
• The Mayor's precept proposal, up to 1,000.

14. On the face of it there is a fourth source, ie the Crime Fighting Fund . However the agreed mechanisms for determining CFF funding mean that officers funded from this source are almost inevitably absorbed in making good wastage rather than contributing to a net increase in officers. The CFF funded officers have therefore been discounted in this analysis.

15. The ultimate constraint on recruitment numbers is the training capacity at Hendon. Allowing for returners and serving officers from other forces, Hendon, with the enhancements introduced this year, can support a total recruitment of about 3,000 per year. Currently wastage rates are around 1,500 per year, so that Hendon can support an annual net addition to police strength of 1,500.

16. If the counter-terrorism funding next year was in line with the bid, a total of 1,050 officers would be recruited funded by the Home Office and TfL. This would leave capacity for only a further 450 officers funded from the precept. If on the other hand the counter-terrorism funding supported no more than 250 officers the full 1,000 officers in the Mayor's original proposal could be recruited.

17. Thus the number of officers to be funded from the precept is dependent upon the decision yet to be made on the ongoing counter-terrorism bid. The potential range is between 450 and 1,000.

Cost of additional officers

18. The figure of £22.7 million which has been used to calculate the precept requirement for 1,000 officers is a simple extrapolation of estimates provided as part of the medium term financial forecasts in June 2001. It is now considered deficient because it does not take adequate account of all the associated costs.

19. Appendix 3 sets out the revised calculation of the full additional costs which should be included to support 1,000 extra officers (column 1). The calculations are supported by explanatory notes. In addition to the direct pay and equipment costs of new recruits the costs cover the higher cost of additional officers within Specialist Operations, supervision, support staff and operational accommodation. Step change costs arise with significant increases in numbers; taking the current year and next year together there is a 10% increase in officer numbers. This triggers the need for additional training, housing and recruitment costs. On this basis the cost of recruiting 1,000 new officers is assessed at £31.9 million rather than £22.7 million.

20. Column 2 of the Appendix assesses how many officers could be recruited with a total provision of £22.7 million taking account of the same elements of cost. The conclusion is that the provision would support 661 new officers rather than 1,000. The third column illustrates an intermediate cash limited option with a provision of £27 million which would produce 818 officers.

21. The number of officers which can be funded by £22.7 million (661) falls within the potential range 450-1,000 set out in paragraph 17 above. Members will wish to consider the assumptions underlying these calculations before seeking the views of the Mayor. At this stage the budget provision has been retained at £22.7 million pending further review with the Mayor when the counter-terrorism bid has been settled.

Review of commitments

22. The assumptions underlying the unavoidable expenditure increases have been reviewed as a result of which there are a number of amendments to be made to the budget.

23. Interest rates were reduced by a full 0.5% in November. As a result the forecast of investment income in 2002/03 is now £8 million, a £2 million reduction from the provision reflected in the draft budget submitted to the Mayor.

24. The estimate of police pension payments can be reduced by £1.4 million to reflect the latest actual RPI-based increase.

25. It has now been confirmed that we will receive Home Office grant for drug referrals next year, amounting to £0.7 million.

26. The police pay budget currently includes a vacancy factor which reduces the budget by £4 million. This is normal practice in a stable situation where staff turnover results in short term vacancies between leavers and starters. However it is now apparent that, having geared up the process of recruitment and training to meet the headline target for officer numbers, frictional vacancies have been virtually eliminated. Indeed the absence of vacancies is one reason for the overspending of police pay in 2001/02. If there is to be a continuing imperative to achieve budgeted officer numbers the vacancy factor should be removed from the budget. If it were to be retained there would have to be an explicit acknowledgement that actual police officer employment would fall well below target. This is a budget adjustment necessitated by the requirement to secure maximum police officer numbers and one option would be to meet the funding shortfall from the precept. Members may wish to raise this issue with the Mayor. At this stage the elimination of the vacancy factor has been treated as an addition to the savings target.

27. The net effect of these changes, including the elimination of the police pay vacancy factor, is to increase the unavoidable expenditure increases by £3.9 million from £69.3 million to £73.2 million.

28. One effect of the short term savings being made in the current year to eliminate a forecast overspending is that certain IT and PSD works slip from 2001/02 into 2002/03. The impact will have to be contained next year by slipping equivalent work into 2003/04 and work is in hand to identify specific measures.

Savings target

29. The adjustments set out in the previous paragraphs lead to a revised savings target as follows:

30. The savings target will be further impacted by the revision to the grant forecasts following the grant settlement. This impact will form part of the oral update following the announcement on 4 December.

Savings

31. An extensive exercise has been undertaken to identify savings which can be reflected in next year's budget. The results are set out in Appendix 4. It must be stressed that many of the numbers are provisional and there is an ongoing process to refine and firm up the figures.

32. The exercise has been constrained by the need to maintain police officer numbers. Nevertheless some of the savings proposals do involve reductions in specific areas of policing and there is a consequential reduction in officer posts of 44 in total. This will marginally offset the substantial increases in police officers elsewhere in the budget.

33. Although we have argued that, since pensions in payment cannot be reduced, that puts a further significant area of the budget out of reach for cash savings the estimate of future pensions costs has nevertheless been scaled back on a view that it does not adequately reflect the scale of underspending on this budget in recent years. There is a degree of risk in this reduction and it is proposed that we carry out a more in-depth study of the police pensions budget and forecasts, possibly employing actuarial consultants.

34. Long term outsourced service contracts also limit the Authority's flexibility in seeking savings, but again further examination is revealing opportunities to manage more effectively the organisation's costs against those contracts.

35. There is a proposal from the MPS Management Board to utilise savings of £10 million arising from civil staff vacancies to support the police overtime budget which has overspent by substantial margins in recent years. On the basis of last year's outturn and the current year's forecasts, even ignoring the exceptional circumstances since 11 September, overtime has been running in excess of £20 million above budget. An increase in the budget of £10 million, funded from civil staff vacancies, still leaves the onus on MPS management to save a further £10 million or more from current spending levels in order to contain future spending within budget. Accenture have carried out a review of overtime as part of the Efficiency and Effectiveness Review programme. Their initial view, subject to further dialogue with the MPS and the Review Project Board, suggests that savings can be achieved largely through better management and the application of best practice across the service at a level which would support this budget objective.

36. It is important not to underestimate the difficulties in achieving this package of savings and the impact that it will have within the service both in terms of operational flexibility and workforce morale.

37. The proposed savings, including the saving of £10 million against civil staff vacancies referred to in paragraph 35 above, total £60.4 million. This is 3% of the total budget but about 10% of the reducible expenditure headings identified in previous reports. Members will wish to review the proposals. However any reduction will further limit flexibility to address the remaining expenditure requirements.

Remaining expenditure proposals

38. The savings identified in Appendix 4 are sufficient to meet the revised minimum savings target of £43 million plus the £10 million increase in the overtime budget (paragraph 35 above), subject to further consideration in the light of the grant settlement. There is a surplus of £7.4 million which is available to fund part of the additional expenditure proposals not yet included in the budget. These total £21.3 million and are listed in Appendix 2.

39. However the provision for the full year effect of the civil staff pay increase following the Hay review needs to be amended in the light of the negotiations which have been proceeding with the staff representatives. The cost of the award at a level which is likely to be supported by the civil staff requires funding of £7.5 million in 2002/03 in addition to the £13 million already in the base budget. This figure substitutes for the £5 million included in Appendix 2.

40. The MPS Management Board has proposed a reduced package of expenditure priorities totalling £14.2 million as set out in Appendix 5. This includes the full provision for civil staff pay. Otherwise seven items from the original list remain intact, of which four relate to legislative requirements, two are to pay for officer safety equipment and the other recognises the current level of activity in call centres. Three items have been provided in part: public order equipment, backlog property maintenance and support for the capital development programme.

41. It is proposed that the specific growth items for the MPA's own direct responsibilities should not be included at this stage. It is suggested that there should be a review of the totality of existing resources being committed against diversity and equalities issues with a view to prioritising the MPA's own requirements within that resource envelope. This would ensure that the MPA can support the work of the MPS in this area whilst fulfilling its own responsibilities. It is proposed that this review be steered by the Coordination and Urgency Committee.

42. The available savings fall short of the expenditure package in Appendix 5 by £6.8 million. Given the Authority's overall financial position a funding shortfall of this size would be unacceptable in the final approved budget. However it is only tolerable at this stage provided there is a clear commitment to close the gap before the Mayor presents his final budget proposals to the GLA Assembly. In this context the Finance Planning and Best Value Committee is asked to make recommendations to the Authority on the allocation of the surplus savings to fund additional expenditure proposals.

Revised summary

43. The following table shows how the overall budget position is adjusted to reflect the changes contained in this report.

44. This position is subject to member consideration of this report, the impact of the grant settlement and any adjustment to the Mayor's precept intentions.

Budget management

45. The successful management of next year's budget is put at greater risk by the magnitude and extent of the savings which will have to be delivered. The evidence of the last two years suggests that there is a worrying propensity for the budget to overspend. Furthermore the Authority's resilience in that situation is very limited because of the low level of reserves.

46. The general reserve stands at £13.5 million at 1 April 2001, subject to audit, representing just 0.7% of expenditure. The District Auditor in his draft audit letter which will be considered by the Audit Panel on 13 December describes the Authority's financial position as 'precarious' and he is minded to qualify the accounts for 2000/01 because of reservations about the adequacy of the provisions set aside to meet insurance and police pensions liabilities.

47. In that context the Authority cannot afford an overspending in 2002/03. The Authority needs to have assurance that appropriate measures are in place before the beginning of the budget year to reduce the risk of overspending. These should be reported to Finance Planning and Best Value Committee.

48. The measures would include:

• More effective budgetary control. Internal Audit are developing a budgetary control framework which will focus on the key controls. The budget management arrangements for 2002/03 will have to comply with these control requirements. It should be appreciated that we will not be able to rely on the enhanced devolved management arrangements for next year since they will only apply in a small number of 'pathfinder' boroughs.
• Delivering the savings. A specific action plan is required for the delivery of the savings identifying key actions and personal accountabilities.
• Establishing strategic flexibility within the budget. The Authority must have options for slowing down expenditure during 2002/03 if the monitoring identifies significant potential overspending or if essential operational requirements cannot be contained within budget. This would involve identifying areas of discrete expenditure which can be slowed or stopped and ensuring that those options remain viable.
• Means of supplementing the Authority's reserves. Discussion is required with the GLA and the Home Office to secure clarification about circumstances where support might be available for exceptional emergency expenditure

C. Financial implications

These are set out in the report.

D. Background papers

MPA/MPS budget files.

E. Contact details

Report author: Peter Martin, MPA.

For information contact:

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

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