2002/03 revenue budget

Report: 15
Date: 17 January 2002
By: Treasurer and Commissioner

Summary

The report covers a number of outstanding issues in relation to the Authority’s budget for 2002/03.

A. Recommendations

Members are recommended to

1. Note the response made to the consultation on the local government finance settlement.
2. Agree that the Commissioner should report to the next meeting of the authority on the implications of the anticipated delay in the Government’s decision on counter-terrorism funding for 2002/03.
3. Note the revised assumptions to support the recruitment of 1,000 additional officers from the budget provision of £28.9 million.
4. Agree that the Budget Scrutiny Group should make recommendations as to a permanent process for identifying savings.
5. Agree the application of any budget flexibility arising from further savings, budget reductions or increased income in accordance with the proposals at paragraph 27.
6. In the context of 5 above, decide whether the expenditure items set out in paragraphs 21-26 should be incorporated in the budget.
7. Note that a report on budget management arrangements for 2002/03 will be made to the next meeting of the Committee.

B. Supporting information

Introduction

1. At its meeting on 10 December 2001 the Authority approved its budget for 2002/03 for incorporation into the Mayor’s consultation budget. The budget was approved reflecting the Mayor’s revised precept intentions set out in his letter of 10 December.

2. The Authority, in approving the budget, agreed a number of subsequent actions which this Committee needs to address.

• The process for identifying savings should continue in order both to provide further resilience to the 2002/03 budget and in anticipation of savings requirements in future years. This Committee is to consider the scope for further savings.
• The Authority should hold back some part of the overall budget as a contingency to be released on satisfactory progress on key deliverables, ie savings and recruitment targets.
• The Authority would review the deployment of the 1,000 additional officers and the assumptions underlying the costings, taking account of decisions by the Home Office on the funding of future counter-terrorism activity.
• A report should be made to this Committee, and then the MPA, on the TfL proposals for enforcement of priority routes.

3. In addition the Committee at its last meeting on 6 December 2001 agreed to receive a future report about budget management arrangements for 2002/03 and to continue with its budget scrutiny work. The Committee also agreed that a report be submitted to this meeting on the DNA expansion programme.

4. The TfL proposals and the DNA expansion programme are the subject of separate reports on this agenda. This report addresses the remaining issues.

Timetable

5. The Mayor’s budget consultation document was circulated for comments on 17 December 2001. The closing date for the consultation is 14 January 2002 and relevant comments will be reported orally to the Committee. The Committee will wish to consider whether the Authority should pass any response on to the Mayor and Assembly.

6. The Mayor will present his draft budget proposals to the GLA Assembly on 23 January. At this stage the Assembly can move amendments to the proposals with a simple majority. The Mayor has to consider any amendments and submit his final budget to the Assembly on 13 February. At this final stage the budget can only be amended with a two thirds majority.

Funding

7. The provisional grant settlement which was reported to the last meeting of the Committee was subject to consultation. The attached response (Appendix 1) was submitted with the agreement of the Chair of the Authority. The final settlement should be announced later this month but no significant changes are anticipated.

8. It is understood that a decision may not be made by the Government on counter-terrorism funding for next year and beyond until the Chancellor of the Exchequer’s Budget in March. In the context of the overall budget position no additional ongoing expenditure can be committed without clear assurances about funding. It is proposed that the Commissioner should report to the next meeting of the Authority on the implications of a delay in the funding decision especially in view of the priority given to counter-terrorism in the Authority’s draft policing and performance plan for 2002/03.

Cost of additional officers

9. In the budget report to the last meeting of the Committee a detailed assessment of the cost of 1,000 additional officers was set out which generated a total for 2002/03 of £31.9 million. This was based on a series of assumptions about deployment, supervision ratios, levels of support, accommodation, etc as well as a number of specific step change costs associated with the substantial volume of throughput.

10. The Mayor’s precept proposals allowed £28.9 million to cover the increase of 1,000 officers. Although this falls short of the assessment reported to the last meeting it is an increase of over £6 million on the figure included in the Mayor’s original precept intentions.

11. The assumptions have been reviewed and it is concluded that the budget provision can accommodate recruitment of 1,000 officers with the following changes to the previous assessment.

12. Firstly, the costing made provision for the financial impact of additional accommodation to maintain the existing existing space per officer ratio. In reality without knowing exactly where the additional officers will be posted, this element served as a proxy for any necessary local alterations to building layout etc. As one of the “softer” assumptions behind the development, it could be changed to one that explicitly expects all additional officers to be accommodated within existing space provision and that any works required would need to be financed from existing budget provision.

13. There are two other assumptions behind the original costing that may be amended in some combination to secure further reductions to the cost of the additional officers. Firstly the split of officer growth between specialist units and borough units currently at 50:50 could be revisited. Members will be aware of the increasing demand for officers in the more specialist squads as a result of increased gun and serious crime activity. These officers come at an additional cost and so any reduction in officer growth in these specialist squads would reduce the total cost. Secondly the maintenance of the ratio of support staff posts to police officers in the operational areas within the costing could be re-examined. This may be appropriate given the work currently underway to identify and remove some civil staff vacancies as part of the 2002/03 budget build. Deliberation about these two areas is continuing within the MPS at the time of writing this report. It is recognised that the final position must be contained within the funding available of £28.9m and a verbal update will be made at the committee.

Savings

14. Savings of £63.8 million had been identified when the draft budget was approved in December. These are detailed in the attached Appendix 2. In addition it will be necessary to make savings of at least £10 million against the current level of actual police overtime costs in order to contain expenditure within the overtime provision in the 2002/03 budget. There is a significant risk that these savings will not all be achieved in full in 2002/03. This was a factor in the Mayor’s revised precept proposals which including capping the savings requirement in the budget at £60 million. Work is continuing, led by the Director of Resources, to validate the savings and to establish implementation plans.

15. Members have received a copy of the Treasurer’s letter to the Chair of the Authority dated 2 January 2002 (copy attached at Appendix 3). This stresses the fragility of the budget position given the inadequacy of the Authority’s reserves. The letter has been copied to the GLA’s Director of Finance and has been shared with the GLA Budget Committee.

16. A continuing process for identifying savings is essential for a number of reasons:

• Further savings options would provide resilience in managing next year’s budget by providing an insurance against the failure to deliver some of the savings already identified.
• As outlined in paragraphs 21-26 below pressures are already emerging which have not been reflected in the draft budget and savings may be required to offset them.
• Further savings will be expected in future years and the sooner these can be identified the more likely they are to be achieved.
• Also in a medium term timeframe savings with a longer lead-in time become feasible.
• There is also the need to address the Authority’s financial reserves and provisions which is highlighted in the report on the external auditor’s annual audit letter elsewhere on this agenda. Delivering savings in advance of future years’ requirements would be one source for improving the reserves.

17. The scope for finding further savings following on immediately from the intensive exercise which has produced the current savings list is clearly very limited. However there are ongoing processes which should be identifying savings options, in particular the efficiency and effectiveness review programme and Best Value reviews. There is also the ongoing budget scrutiny process led by the Chair of this Committee. It is suggested that that scrutiny group should consider how a permanent process for identifying savings should operate and recommend to the Committee accordingly.

18. The report on the DNA Expansion Programme elsewhere on this agenda includes an assessment of the financial position which indicates that there is no net improvement to the budget as currently drafted from that source.

19. However there is one area where the draft budget is probably now overstated, namely, civil staff pensions. Members will be aware that the civil staff pension scheme is being transferred into the civil service pension arrangements for funding and administration, probably from 1 September 2002. The position of the Cabinet Office when we were exploring this option last year with the help of Hymans Robertson was that the MPA would not be able to benefit from the current discounted rates of employers contributions (accruing superannuation liability charges or ASLCs). Hymans’ calculations based on the unreduced rates showed a marginal saving against the current costs which the Committee recently agreed would be used to fund the transitional costs of achieving the transfer. Accordingly no adjustment has so far been made to reflect the new arrangements in next year’s budget.

20. A letter was received from the Cabinet Office on 7 January 2002 informing us that it has now been agreed that all new employers will pay the discounted ASLC rates. This should result in lower expenditure on civil staff pensions than is reflected in the budget. The MPS are now producing a complete revision of the civil staff pensions budget in order to establish the impact. We should be able to report the conclusion of that exercise at the meeting.

New unbudgeted pressures

21. There are a number of instances emerging where spending pressures have not been reflected in the budget. These are set out in the following paragraphs. The general principle must be that these can only be accepted if offsetting savings can be found.

22. Initial funding for the Camberwell Rape Haven Project comes to an end this financial year. It had been intended that the Camberwell Haven Project be extended for a further year by charging the £600,000 required to the Forensic Medical Examiners’ budget. The FME budget is almost £1m overspent this current financial year. Accenture have been examining the budget structure as part of the Efficiency & Effectiveness Review and their interim, as yet unpublished, findings indicate that the Forensic Medical Examiners’ budget will be faced with some difficulty in living within the existing budget and that there is no specific indication that the budget had been increased by the MPS in the past to fund the Haven Project. In effect, therefore, the Camberwell Haven Project remains without funding, although its costs for the current year are simply charged to, and indeed are a contributory factor in the overspend in, the FME budget. If the MPA wishes to continue with the Haven pilot project, appropriate funding or alternative savings will need to be identified.

23. The Custody Nurse pilot at Charing Cross Detention Centre has been funded this financial year from the Occupational Health budget within the HR Directorate. In November Management Board considered a paper on the emerging findings of the Charing Cross pilot which recommended its extension for a further time scale. Management Board agreed to fund the project to the end of this financial year from the Occupational Health budget (an extension of three months) and the possibility of further funding into next financial year from the same source was also agreed. However, it is now apparent that the Occupational Health budget will not be able to fund a further extension of the Charing Cross Nurses pilot project and funding of some £250,000 will need to be identified if the scheme is to continue.

24. Elsewhere on the agenda Members will consider a report on funding various enhancements to the Firearms and Public Order Training PFI contract. If any of these recommendations are approved, then funding will need to be identified as no provision has been made within the budget approved to date. The maximum potential impact on the 2002/03 revenue budget is about £290,000.

25. This Committee considered how the MPA could fund the £250,000 required over the next three years to cover the administration costs of its partner Housing Association in delivering the Affordable Homes Scheme. The Committee’s recommendation that applicants bear their share of the administration costs has not been well received by either the Housing Association or the Housing Corporation itself. It is likely that the MPA will need to reconsider this decision unless it wishes the matter to be raised with Ministers. The cost in next year could be £120,000.

26. The potential impact on next year’s budget of these four items is £1.26 million. The possibility of further unbudgeted pressures emerging in the coming weeks cannot be ruled out. If members wish to have the option to approve such items we need to have some flexibility in the budget arrangements.

27. It is suggested that any flexibility arising from further savings, budget reductions or increased income should be applied at the discretion of the Authority to address the following risks.

• To avoid overspending arising from genuine unbudgeted pressures after all other options for containing expenditure have been considered.
• To protect against non-achievement of the required £60 million savings by supplementing the savings list.
• To improve the financial resilience of the Authority by adding to reserves to secure the general reserve position and to address specific issues referred to in the external auditor’s qualification of the 2000/01 accounts.

28. Initially this approach should be applied to the additional flexibility arising from civil staff pensions. The budget pressures identified in this report should be subject to specific decision by the Committee.

Managing the budget

29. A detailed report on the budget management arrangements for 2002/03 will be made to the next meeting of the Committee. This will cover:

• Budget management responsibilities and accountability
• Monitoring procedures
• Savings implementation plan
• Proposals for holding back a proportion of the budget as a contingency against non-delivery of savings or other overspending.

C. Financial implications

The financial implications are set out in the report.

D. Background papers

• MPA/MPS Budget Files

E. Contact details

Report author: Peter Martin

For information contact:

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

Appendix 1

Romney House
43 Marsham Street
London SW1P 3PY

20 December 2001

Catherine Byrne
Head of Police Resources Unit
Home Office
50 Queen Anne’s Gate
London SW1H 9AT

Dear Catherine

Police Funding Allocations 2002/03

I am responding to your letter of 4 December 2001 setting out the provisional revenue settlement for 2002/03.

It is regrettable that, in the context of a settlement with an overall increase of 6.1% in police resources, the increase in core funding for police authorities is only 2.8%. With police pay awards of 3.5% and continuing pensions growth this is scarcely adequate.

This tends to devalue the earmarked funding such as CFF which has to be regarded as an essential supplement to core funding rather than purely additional to meet specific purposes.

The treatment of NCS/NCIS is particularly unfortunate. The change of funding with the abolition of the levy system has reduced police authorities’ influence in this area but we have been impacted directly by the decision to increase the national bodies’ funding by 24% which is effectively a top-slice from resources which would otherwise have been available to police authorities.

The MPA had previously registered a concern about the potential costs of policing the Queen’s Golden Jubilee next year. One option would have been to address this through the special payment. This has clearly not been done.

The MPA’s financial position, largely as a result of its inheritance from the previous cash-based accounting regime, has very little resilience and we will have to pursue this issue further as the Golden Jubilee plans are clarified and the policing costs can be estimated more precisely. I trust that the Home Office will be receptive to such an approach.

The Authority welcomes the decision to provide £22 million towards the exceptional costs this year following the terrorist attacks in the USA on 11 September. However there was no decision as part of the settlement about the ongoing costs of counter-terrorist activity. Further delay in determining the Government’s response to the Authority’s bid will have adverse impacts on operational planning as well as on our ability to finalise the Authority’s budget for 2002/03. There is a continuing dialogue on this issue; an urgent resolution is now required.

There are a number of other outstanding funding issues which are not addressed in this settlement. Some like C3i and the strategic fuel dumps are being progressed. Others such as the basis of the London pay lead grant and the issue of funding recruit training have not been satisfactorily answered. I must therefore register that we remain as concerned as ever about these issues and will continue to press for redress.

Yours sincerely

Peter Martin
Treasurer

Appendix 2

Appendix 3

Romney House
43 Marsham Street
London SW1P 3PY

2 January 2002

Toby Harris
Chair, MPA
Romney House
Marsham Street
London SW1P 3PY

Dear Toby

2002/03 Budget

I am writing this letter in my capacity as statutory chief finance officer of the MPA under s127 of the Greater London Authority Act 1999.

The MPA component budget in the Mayor’s consolidated budget for 2002/03 was agreed by the Authority on 10 December 2001 in accordance with the Mayor’s precept proposals set out in his letter of the same date.

Those proposals included increasing the police precept by a further £18 million, compared with the Mayor’s previous intentions, of which £12 million was specifically to eliminate the funding gap for which savings had not been identified and to cap the total savings requirement at £60 million (3%) thus providing a small cushion against failing to deliver in full the savings which had been identified totalling £63.8 million.

The Authority has agreed, on my advice, that the minimum acceptable level for its general reserve is 1% of total expenditure, which would be £21 million for 2002/03, provided that there are appropriate accounting provisions and earmarked reserves, reasonable insurance arrangements, a well funded budget and effective budgetary control. At 1 April 2001 the general reserve stood at £13.5 million (0.7%) and none of my conditions has been fully met.

The external auditor has now published his annual audit letter following the audit of the 2000/01 accounts, in which he describes the Authority’s financial position as ‘precarious and… of great concern’. He refers to the ‘need to build up sufficient balances to meet unforeseen needs’. The auditor has qualified the accounts because of reservations about the adequacy of the provisions set aside to meet third party and police pension liabilities.

You may be aware that the recent White Paper on local government proposes that there will be a new duty placed on local authorities to ensure that they have adequate reserves.

The vulnerability of our position was underlined in October 2001 when an overspending forecast of £13 million coincided with the exceptional unbudgeted costs following the terrorist attacks of 11 September with no certainty at that stage around the level of Government support. There was a significant risk that we would not have the resources to cover our expenditure.

In this context, and given that the remaining budget consideration will take place between the Mayor and Assembly where my statutory responsibilities do not apply directly, I feel it is incumbent on me to set out in writing my opinion on the validity of the police budget in the form that it has been passed on to the Mayor.

It is my view that the budget as now constructed is sound in the sense that it can be managed within the available resources. That is not to minimise the scale of the task ahead if we are to achieve that result, especially in delivering £60 million savings on the ground. However I believe there will be tangible improvements next year in the environment in which budget management will take place in the Metropolitan Police.

Nevertheless the budget does not assist in improving our reserves position and we continue to operate therefore with very little resilience.

I would have to advise that any further reductions in the police precept which relied on unidentified, unvalidated or unsound savings would affect my opinion. I would have to consider carefully whether the resulting budget was manageable in its existing form.

I have copied this letter to Anne McMeel who as Director of Finance for the GLA has the statutory responsibility in relation to the setting of the precept through the Assembly. I would expect her to take account of my views in making her own judgement.

Yours sincerely

Peter Martin
Treasurer

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