Medium term financial projection – interim report

Report: 13
Date: 18 April 2002
By: the Treasurer and Commissioner

Summary

 The report sets out the process and context for the preparation of the Medium Term Financial Projection 2003/04 to 2006/07 and discusses some key issues arising from a Service-wide data collection exercise initiated during February 2002. It provides an interim summary of the information collected, with further details to be reported to the May meeting of Finance Planning & Best Value Committee with a view to members' guidance being provided about items for inclusion in the final Medium Term Financial Projection.

A. Recommendations

It is recommended that the Committee:

1. Note the proposed methodology and timescale for preparation and roll forward of the Medium Term Financial Projection (MTFP) 2003/04 to 2006/07 (paragraph 4).
2. Note that further information about new items during period 2003/04 to 2006/07 will be reported to the May meeting of this Committee for guidance as to their eventual inclusion in the final MTFP (paragraph 4).
3. Note that the final MTFP will be presented in June/July 2002.
4. Note that the information gathering undertaken to inform the MTFP will initiate the budget preparation process for 2003/04 (paragraph 4).
5. Consider the details provided in paragraphs 11, 12, 16 and 17 and offer guidance as to any changes in these that should be reflected in the MTFP to be presented in July.
6. In particular the MPA are asked to consider the level of police officer growth during this projection.

B. Supporting information

There are three appendices to this report (see Supporting material):

• Appendix 1: 2002/03 Budget – budget build and financing assumptions.
• Appendix 2: List of statutory or contractually committed items 2003/04 to 2006/07.
• Appendix 3: Interim funding position 2002/03 to 2006/07.

Background

1. The MPA's first Medium Term Financial Projection (MTFP) was prepared for the Finance Planning and Best Value Committee in April 2001. This was updated during May and June 2001 to inform the subsequent budget setting process for 2002/03, with the ultimate approval of this year's budget by the Mayor and Assembly on 13th February 2002.

2. This report revisits the June 2001 MTFP with a widening of the information collection process within the MPS with a view to improving the projection compiled. The approach followed to prepare this report is set out in paragraph 4 below, and reflects the incremental development of this activity. The District Auditor has already commented that the Corporate Planning and Financial Planning are not adequately linked. This has not been addressed in developing this projection, and further work to improve the links between these two activities is intended.

3. The Mayor has not yet determined any guidance or timetable for the 2003/04 budget process although preliminary discussions have taken place with GLA officers. Provision of the medium term forecasts was the first stage of the Mayoral process for developing the 2002/03 budget and it is expected to play a similar role this year. The timetable is likely to be similar too. Last year the medium term forecasts were required by the end of June.

Service-wide data collection exercise

4. This report is the first part of the process designed to inform the planning framework for the 2003/04 budget and which will result in the roll forward of the MTFP to 2006/07 to be approved by the Authority for submission to the Mayor. The exact timings will need to be agreed with the GLA but final approval will probably be required either at the full Authority meeting scheduled for 27 June 2002 or the meeting of Finance, Planning and Best Value Committee on 11 July. The updating process has been launched as follows:

• Initiation of a Service-wide exercise to obtain information from the Service concerning material budget pressures over the Planning Period (2003/04 to 2006/07). This has already been actioned, and responses received.
• The undertaking of a corporate review of the base budget position, re-visiting the assumptions and information that supported the build assumptions. This has been completed.
• Preparation of a summary statement for the Commissioner's Management Board and this Committee, which sets out the key points of the corporate review focussing on the impact of existing commitments and identifying potential policy developments. This report.
• The undertaking of internal scrutiny and validation on the responses received from the Service. In progress.
• Finalisation of the MTFP based on the work undertaken to inform the corporate review, the result of the scrutiny and validation process referred to above, and emerging views concerning the Mayor's or members' intentions on police officer numbers and other issues. This will form the basis of the work to be reported initially at the next meeting of this Committee on 29 May.

5. The MTFP sets out funding projections for the period based on forecasts of government grant and, at this stage, the precept at its 2002/03 approved level. The grant forecasts are based on the Government's current spending plans which were set as a result of the last spending review (SR2000), of which 2003/04 is the third and final year. SR2002 will be concluded in July 2002 and will review 2003/04 as the first year of the next three year plan. The funding forecasts contained in this report will therefore have to be reviewed in the light of SR2002 and its detailed implications as and when these become clear.

6. The MTFP will be submitted to the Mayor and will inform his view about the level of precept which he would intend to recommend for 2003/04. The funding envelope formed by the grant forecasts and the Mayor's precept intentions will provide the parameters for the subsequent construction of the detailed budget for 2003/04.

7. The following sections of this report set out the interim position reached in the updating of the MTFP. In particular Table 1 below should therefore be treated with caution as additional work to evaluate the identified budget pressures is being undertaken for the subsequent finalisation of the MTFP.

The base position

8. The base position for the updating of the MTFP has been established as follows:

• The base position for this exercise is the 2002/03 Budget (Outturn prices) as set out in Appendix 1. As indicated in paragraph 4 above, Business Groups were asked as part of their budget setting process to validate the build assumptions for this base budget.
• In validating the base budget, it has also been necessary to review the attainment of the £60 m. savings target needed in 2002/03 to bridge the budget gap. In this regard the MPS has established a Budget Savings Team under the leadership of Commander Given to ensure that these savings are either delivered or, if necessary, alternatives are found.

Service consultation and review

9. The Service-wide Financial Planning Exercise was launched on 20 February 2002 to identify "big ticket" issues that may impact on the Service's overall forecast levels of expenditure or income in the years 2003/04 to 2006/07. Accordingly responses were requested which exceeded a de minimis value of £250,000. Business groups were asked to indicate the status and phasing of each item reported and to identify whether there is scope to influence commitments or developments.

10. There may be pressures below £0.25m which, collectively, add to the financial pressures, but which would not be captured in this exercise. In-year budget pressures are already becoming apparent and will need to be considered as part of the "base-line" position in the July meeting when this projection is next updated and reported.

Corporately reviewed factors

11. In the analysis which follows the following factors have been adjusted at global level:

• The impact of the Police Reform agenda on police pay, overtime and allowances (insofar as these can be foreseen at this time). This will, of course, be subject to decisions by the Government and the availability of extra funding through SR2002. For the purposes of this report we have assumed that the additional costs will be fully matched by extra funding but this is by no means certain.
• The future impact of the Hay review on civil staff pay costs.
• The medium term implications of growth in police pensions. These figures may need to be updated in the light of the actuarial review referred to in paragraph 13 below.
• Transfer of civil staff pensions to the Civil Service scheme in 2002.
• The progressive reduction in the cost of rent/housing allowance and compensatory grant.
• The progressive reduction in officers in receipt of the £1,000 allowance to compensate for housing allowance anomalies.
• The progressive effects of the increasing overall cost of the London Pay Lead for police officers.
• The full year effect in 2003/04 of the additional 1000 officers in 2002/03.
• The adjustment of forecast pay awards and latest estimates of movements in RPI.

Assumptions

12. The projections set out below contain the following assumptions:

• The starting point is the approved 2002/03 base budget
• Cashable efficiency savings of 0.5% have been included as a notional provision at this stage. The first tranche of efficiency and effectiveness reviews is nearing completion and the savings opportunities will need to be assessed particularly in terms of potential timing. The output from tranche 1 will be considered in detail at the next meeting of the Committee and its incorporation into the MTFP agreed
• Pay awards throughout the period of 3.5% pa for police and civil staff
• Price inflation of 2.5% throughout the period
• The revenue implications of the approved capital programme are reflected in the figures; testing this assumption will be a specific part of the validation process.
• There will be no further PFI schemes coming into commission over the period and that levels of capital funding are broadly comparable with the current year.

Factors excluded

13. The projections specifically exclude the following:

• Any assumption about further growth in police numbers over the period beyond the level of around 28,000 (plus the number funded centrally for counter-terrorism duties) implied by the current year's approved budget. Members are reminded that current C3i Project proposals will lead to a reduction of around 800 police officer posts from this number as a result of civilianisation. A case has been put to the Home Office for specific additional funding to allow these posts to be retained but there is no indication that this will be forthcoming. Members' views are particularly requested in relation to any provision which should be made for increased funding for police officers in the medium term forecasts.
• Any additional costs associated with measures in the Police Reform Bill, including the employment of Community Safety Officers (other than those which may be funded from funds provided for counter-terrorism or by TfL for the new Transport OCU). It is assumed that these may be fully externally funded.
  • No proposals are included in respect of additions to the Authority's financial reserves. Reserves policy was considered by the Committee at its last meeting. We will need to review the position in the light of the 2001/02 outturn which should allow some changes to provisions and reserves. We are also arranging for an actuarial assessment of future police pensions costs to inform decisions about the appropriate level of reserves.

Key messages

14. The exercise collected information categorized according to whether the pressures identified are statutory, contractually committed, or a result of existing or new corporate policies.

15. The principal issues raised within the statutory category in 2003/04 were the effect of increases in the National Non-Domestic Rate (£1.2 m.) and measures designed to give effect to Part 2 of the Youth Justice and Criminal Evidence Act 1999 (£3.0 m.)

16. The main issues in the contractually committed category in 2003/04 were the impact of the two PFI schemes for the new Firearms Training Centre at Gravesend (£5.7 m) and SE London Police Stations (£8.2 m.), the implementation of the Airwave Radio Service (£3.9m), and rent reviews (£4.6m.). These items are partially offset by reduced commitments against the provision in the base budget.

17. A list of the items included in the statutory and contractually committed categories is at Appendix 2.

Observations on expenditure forecasts

18. The financial impact of the issues discussed in paragraphs 8, 11-13 and in Appendix 2 is shown in Table 1 below.

Table 1: Interim Medium Term Financial Projection 2003/04 to 2006/07

Changes since the last MTFP

19. The main changes to the projected net expenditure for 2003/04 since the last MTFP reported in June 2001 may be summarised as follows:

Table 2: Changes since the last MTFP

Implementation of existing and new policies

20. In addition to the items shown in Appendix 2, a number of new items have been identified by the Service. These are still undergoing internal scrutiny and will be reported in more detail to the May meeting of this Committee.

21. They fall broadly into two categories – existing policies and new policies. The existing policy items include the projected expenditure on Counter Terrorism measures. It is assumed that these costs will be fully financed by funding from the Home Office although this has yet to be confirmed. New policy items include costs associated with the implications of the Glidewell Report which recommended joint police/CPS criminal justice units to improve the effectiveness of the criminal justice process, the Youth Inclusion Programme, extending the rape havens initiative and proposals to be brought forward as part of the Best Value Review of Crime Management.

22. These items are not included in the summary at Table 1. Members' guidance about their inclusion will be sought at the May meeting of this Committee.

Funding Projections

23. A summary of the projected funding levels for the period is at Appendix 3. These projections assume no increase in the amount raised from the precept.

24. At this stage the increase in general grant funding has been based on the SR2000 provision for 2003/04. This provides for an overall increase in police resources of 3.1%. However the overall increases in the two previous years have translated into increases at only half their level for formula-distributed grant to police authorities. If this pattern were repeated it would imply an increase in formula-distributed grant for 2003/04 of only 1.5%. Consideration of the likely relative movements in earmarked grants suggests that this would be over-pessimistic and the projections in Appendix 3 are based on an assumed increase of 2% as the mid point of a range of 1.5%-2.5%. Each 0.5% change in the assumption would change the grant forecast by about £8.5 million.

25. Grant projections will vary for two broad reasons:

• Changes in the national provision for policing
• Changes in the distribution of the national provision.

26. Reference has already been made to SR2002 concluding in July this year. This will re-set the national total for police expenditure in the Government's plans for 2003/04 and establish the position for the two subsequent years. A change in the overall provision will feed through proportionately to all police authorities.

27. Distribution is affected by data changes and by changes in the methodology for setting the distribution formula. Data are updated on an annual basis. There will be significant variations in the medium term period as new data from the 2001 census is incorporated since this involves a ten year updating all at once. The main impact will probably not be until 2004/05.

28. There has been a moratorium on formula changes for the last three years but a review is currently under way to determine changes which would affect 2003/04. The review has not yet concluded. The major areas likely to be affected are:

• The elimination of the remaining 10% weighting for the establishment factor, which damped the impact of the new formula introduced in 1995 is virtually certain. This will result in a loss to the MPA of about £20 million.
• The Area Cost Adjustment (ACA), which compensates for higher costs in London and the south east is under review. We can probably resist the more simplistic alternative approaches but there remains a risk that the MPA will be disadvantaged by any agreed changes.
• The police activity analysis underlying the allocation formula is being updated. Initial results suggest that this may prove favourable to the MPA but it is too early to draw firm conclusions.
• Any favourable movement in the formula towards the MPA is likely to prompt further questioning of the level of the special payment.

29. It is not possible at this stage to make any confident prediction of the overall effect of these potential changes and no assumption has been built into the grant forecasts In respect of distributional changes. The situation will be monitored carefully.

Specific Grants

30. Appendix 3 also shows the significant proportion of funding that is derived from specific grants (e.g. Crime Fighting Fund and DNA expansion grant). Many of these grants are of limited duration, and there is no certainty about future arrangements for funding these items. Following the Comprehensive Spending Review some may continue as separate entities to enable Home Office to maintain its control over the purpose for which the grant can be used, whereas others may be subsumed into the main formula-allocated pot (although at what level may be difficult to discern) at which point the direct link with actual costs incurred will be lost. The potential risk surrounding these funding projections is therefore considerable but not quantifiable at this time.

Summary

31. The overall picture revealed by this exercise may be summarised as follows:

Table 3: Comparison of forecast expenditure with potential funding

32. The projections shown above are based on the following assumptions:

• That the impact of counter-terrorist activity post-September 11 is cost neutral, i.e. that the level of funding as shown in Appendix 2 is sufficient to cover the Service's costs. An announcement about this funding is expected on 17 April and a verbal update will be provided at the meeting.
• That the cost of the new Transport OCU remains cost neutral throughout the period.
• No PFI credits will be made available for existing PFI schemes.
• That there will be no change in the method of funding police pensions.

C. Financial implications

The financial implications of this report are set out above.

D. Background papers

MPS medium term planning files

E. Contact details

Report author: Keith Luck, MPS.

For information contact:

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

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