2001/02 revenue budget monitoring update

Report: 09
Date: 29 May 2002
By: Treasurer and Commissioner

Summary

The report sets out the latest position on the financial outturn for 2001/02. The report also considers the issues relevant to final decisions on the application of surpluses arising from underspending against budget.

A. Recommendations

The Committee is asked to:

1. Note the information contained in this report and comment on the potential treatment of the surplus resulting from the budget underspending.

B. Supporting information

Overview

1. The revenue outturn position for 2001/02 that was reported to members in April indicated an underspend against the budget of £7.53 million (FPBV paper 02/55 refers). Members are reminded that this position excluded a sum of £4.16 million held as the MPA contingency that is not being called on for 2001/02 and will be transferred directly to reserves in accordance with a previous FPBV Committee decision (FPBV Committee minute 176 refers)

2. During April and early May, the MPS has been following a detailed project plan to deliver a set of audited financial statements for the Authority to statutory timescales. At the time of compiling this report, there remains a number of unresolved issues explained later in this report that prevents a robust outturn figure being stated. However there are no issues yet identified that would indicate a threat to the underlying position reported in April.

3. The April outturn report indicated that it was expected that there would be significant movement on a number of budget lines as the accounts closure process occurred. There are two major impacts here. Firstly, there is the extent to which the organisation continues to have difficulty in relating forecasts of income and expenditure to a regime that recognises accruals and provisions. Secondly there are indications that the organisation is not as sensitive to changes in income and funding levels as it ought to be.

4. The financial position presently being established is consistent with accounting policies already set by the MPA and takes account of a number of matters that have already been the subject of discussion at Committee and/or the FPBV Chairs Budgets Group. In the context of this report, no distinction is made between transactions that require either accruals, provisions or a transfer to reserve. During the course of the audit process, the appropriate classification will be determined and as such the presentation of the final accounts may look markedly different to the regular monitoring statement presented to committee although the overall position will be consistent.

Key issues

Funding and income

5. While the organisation's forecasting is improving, the sensitivity of forecasts to changes in income is not developing at the same pace as that for expenditure. In progressing the closure of accounts for 2001/02 a range of income and funding issues have been identified late in the process which need further work to clarify and validate, particularly in the area of partnerships etc. The position regarding funding the establishment of Criminal Records Bureau (CRB) is now clearer, which allows us to recognise the funding which has been confirmed. Further, success in recruitment and focusing funds on Street Crime, has enabled us to secure higher than forecast levels of funding for 2001/02.

Expenditure Reserves/Provisions

6. There are a number of major transfers to provisions and reserves that are being included in the outturn position:

• Third Party Claims/Compensation. Earlier indications were that a provision of at least £20 million was required. The underspending on the budget has been accrued thereby creating £13 million provision. No provision was made for this purpose in the 2000/01 accounts because of the lack of reliable information. This was a specific issue in the external auditor's qualification of the accounts.
• Bad debts – following review of all debts, provision increased to £6.3 million from £2.7 million. The principal items covered include £4.8 million for administration costs charged to NCS and NCIS, together with £0.8 million owing by HM Customs and Excise. All these charges are currently being disputed.
• Police commuted pensions. To comply with current accounting policy, a provision of £19.7 million is required which is £9 million higher than at the start of 2002/03. The inadequacy of this provision was also specifically referred to in the accounts qualification.
• Outstanding Hay implications. At the time of writing the full impact of the Hay implementation is unclear due to of the level of appeals made and a number of corrective transactions required. Accordingly the unutilised tranche of 2001/02 budget for the Hay increase (£3.4 million) will be carried forward as a provision against the outcome of these uncertainties.
• Counter-Terrorism. The additional Home Office grant in respect of CT expenditure was fully committed in 2001/02. However a small tranche of expenditure is required to be held as a provision or ear marked reserve to recognise the appropriate accounting treatment in the context of unsatisfied procurement orders and property works.

7. The MPA has previously supported the use of an available underspend arising from 2001/02 to provide one-off funding for particular demands and pressures that have emerged over recent months. These are:

1. Funding for administrative fees in respect of affordable housing: £800,000.
2. Funding for minor variations to the PFI Firearms and Public Order Training facility: £277,000.
3. Funding for external consultancy and legal services costs in support of the procurement strategy for the next phase of service outsourcing: £1 million.

8. There remain three identified, but as yet not fully quantified, issues that will impact the final position. Firstly, there is the extent to which the significant increase in income received during the latter stages of 2001/02 should be correctly carried forward to 2002/03 as income in advance rather than charged to 2001/02 income and expenditure statement. Any income carried forward will have the effect of reducing the underspend.

9. Secondly there continues to be a debate with the District Auditor over an issue that came to light during the audit of 2000/01 accounts. This concerns the point at which the MPA should recognise reimbursement of tax paid on compensatory grant paid to pre-Sheehy officers. A change in accounting policy to reflect the auditor's preferred position would result in an additional £3 million charge to the income and expenditure statement so also reducing the underspend. There will be further dialogue with the external auditor to clarify his position on this issue. In particular we will want to avoid any possibility that this might be an additional cause for qualification of the accounts in 2001/02.

10. Finally the committee have already supported the concept of allowing boroughs that have contributed to the overall financial position by underspending against their devolved budgets to carry forward a proportion of the underspend to 2002/03. To determine the BOCUs true financial position an analysis needs to be completed that compensates appropriately for the impact on local expenditures of Counter Terrorism activity and partnership working, both of which attracted unbudgeted income during 2001/02. Any agreed carry forward will also reduce the level of underspend.

Treatment of final surplus

11. Any resultant underspend after these issues have been resolved will be available for enhancing provisions where appropriate or for transfer to reserves. Two key objectives need to be considered as part of the financial management strategic programme: 1) securing the removal of the accounts qualification as soon as possible; and b) strengthening the authority's financial reserves.

12. The qualification of the 2000/01 accounts specifically relates to the inadequacy of provisions for current liabilities in respect of third party claims and police pension commutations. The accruals reported in paragraph 6 above go some way towards meeting these deficiencies. It is our intention to seek a view from the District Auditor as to what would constitute 'adequacy' in terms of these provisions and would therefore allow him not to repeat the qualification for 2001/02. This could then be considered in the context of the amount of underspending available and the requirements for improved reserves.

13. The Authority's general reserve stands at £13.5 million as at 1 April 2001. To this will be added the balance on the MPA contingency of £4.2 million taking the reserve to £17.7 million. The Authority's policy is that the minimum acceptable general reserve, subject to conditions about the robustness of the finances in other respects, is 1% of net expenditure which is £21 million. A further £3.3 million would therefore need to be set aside to achieve the minimum level. Since the conditions applying to the acceptability of the minimum have still not been fully met there is justification for exceeding the minimum at this stage.

14. However the judgement about a further transfer to the general reserve at this stage should also take account of other measures affecting the financial resilience of the Authority. Specific steps have been taken to safeguard budgetary control in 2002/03. These include the agreement of a budgetary control framework and measures to ensure compliance, the temporary holdback of £10 million of the delegated budget and retention of savings on civil staff pension costs as a contingency under the control of the MPA. Furthermore there is substantial additional funding in 2002/03 and there are issues about whether it can all be spent in the year. Some of the risks around potential budget overspending have therefore been mitigated.

15. The Authority has also agreed in principle to the establishment of a reserve to meet future increased pension costs. Actuaries have been employed to provide an assessment of costs over the next 10 years which will then inform judgements about the appropriate level of reserve. The actuaries will report by the end of July and it is proposed that their findings should be considered in the context in the 2002/03 accounts and future years budgets.

Conclusion

16. The indicative final position for the MPA is an underspend of no more than 0.5% of the budget. There are a number of appropriate transfers to provisions and reserves that are currently being made in accordance with stated accounting policies, standard accounting best practice and decisions already made by the Committee. There still remain several issues to be resolved and reflected before final decisions on reserves and provisions can be made.

17. At the time of compiling this report, the final accounts process is continuing. Members will be aware that the accounts are subject to audit and further update reports will be presented to this committee until the 2001/02 accounts process is fully completed.

C. Financial implications

The financial implications are those set out in this paper.

D. Background papers

Existing Committee reports referred to above

E. Contact details

Report author: Bob Alexander, Director of Finance, MPS.

For information contact:

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

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