Revenue budget 2001/02 pre-audit outturn position

Report: 08
Date: 11 July 2002
By: the Treasurer and Commissioner

Summary

This report sets out the final pre-audit position of the revenue outturn for 2001/02. It also builds on earlier considerations of the application of surpluses arising from budget underspends.

A. Recommendations

1. The Committee is asked to note the information contained in this report and endorse the further proposals in respect of the surplus resulting from the budget underspending.

B. Supporting information

Overview

1. At the meeting of the Finance Planning and Best Value Committee on 29 May 2002, members received a paper (FPBV/02/76) that provided an update on the emerging revenue outturn position for 2001/02 and considered a number of financial issues for consideration in the preparation of the accounts prior to audit.

2. At the time of preparing this report, although there remain a small number of issues that require final reconciliation and working paper finalisation, it is possible to report a robust outturn position to the Committee that will form the basis of the accounts that will be presented to District Audit/KPMG for formal audit.

3. Appendix 1 (see Supporting material) presents the final outturn expenditure and income against budget, after including provisions and transfers to earmarked reserves set out later in this report. The resulting underspending that is therefore available for transfer to the Authority's general reserve is £8.6m which increases the general reserve to £22.1m at 31 March 2002. The Authority's policy is that the minimum acceptable level of general reserve is 1% of net expenditure provided that there are appropriate accounting provisions and earmarked reserves, reasonable insurance arrangements, a well funded budget and effective budgetary control. 1% of net expenditure would be about £21 million but since the conditions for the acceptability of the minimum level have not all been fully met it is appropriate to set the general reserve above 1%.

4. The general reserve transfer of £8.6million comprises the pre-determined transfer of the residual balance on the MPA contingency of £4.2m and the final underspending after making appropriate provision for probable and quantifiable liabilities of the Authority.

5. That there is a residual underspending available to reinstate the general reserve following the erosion of the reserve in 2000/01 is predominantly due to the impact of the Budget Star Chamber process combined with the receipt of additional income that was not apparent when concern for a potential overspend in 2001/02 was first raised.

6. The statement at Appendix 1 (see Supporting material) shows a number of expenditure variances, many of which have been highlighted previously to Committee. The major variances to note are:

Police Pay: Members will recall that the mid-year revision to the police Pay forecast was one of the precursors to the Budget Star Chamber process. A budgeted vacancy factor made impossible to achieve by recruitment success, a pay-award above inflation provision and the announcement of unbudgeted back-dated allowances, all contributed to the overspend in this budget area. Due account has been taken of all these factors when setting the budget for 2002/03.

Civil Staff Pay: An inability to recruit at pre Hay salary levels combined with the moratorium on civil staff recruitment through the latter months of 2001/02 to assist in rectifying the mid year forecast position, worked together to produce this 7.5% underspend.

Police Overtime: Police overtime had been forecast to overspend significantly from the early months of 2001/02. Management action was being taken to curb overtime expenditure when the impact of September 11 hit policing operations. More than 50% of the overspend is funded from a significant tranche of the £22m Counter Terrorism grant received at the end of 2001/02. Members will be aware that in addition to continuing with the implementation of the Accenture recommendations that support the reducing of overtime expenditure, an additional £10m was transferred into this budget for 2002/03. The MPS has also been successful in securing additional 'Street Crime' grant in 2002/03, a substantial amount of which will be directed at funding police overtime.

Housing/Rent Allowances: The overspend is as a consequence of the change in accounting practices explained later in the report at paragraph 12.

Police Pensions: The underspend finally recorded is less than forecast in previous reports as a result of the revenue charge required to bring the provision for police pension liabilities to a level consistent with the authority's existing accounting policies.

Business Group Transport Costs: A significant tranche of the overspend in this category is as a result of counter-terrorism response and so funded by the grant made reference to previously. In addition, as part of the closing process, significant inroads have been made into finalising the reconciliation of the large number of imprest accounts from this and previous years in direct response to audit criticism. This has seen additional, legitimate and non-recurring travel and subsistence expenditure charged to 2001/02 Income and Expenditure account.

Business Group Running Costs: Once the impact of Counter Terrorism expenditure is abated, a major contributor to the resultant overspend is unbudgeted expenditure relating to partnership activity that is offset by unbudgeted income.

Service Wide Premises Costs: There are a number of significant factors contributing to this overspend. Approximately 50% of the overspend can be explained by the impact of counter terrorism expenditure and higher than budgeted accommodation charges. These are both offset by unbudgeted income (the counter terrorism grant and rents receivable). However there are overspendings against legal charges and maintenance budgets that are being specifically reviewed as part of the outturn process although they will reflect an element of the increases in property related provisions and reserves.

Service Wide Supplies and Services: After abating the impact of counter terrorism expenditure, the significant contributors to this overspend are the overspend against forensic budgets of £13m, the creation of appropriate provisions to support the costs of the Health and Safety Executive challenge and the resolution of the vehicle recovery saga and additional expenditure on witness/jury protection.

7. The statement at Appendix 1 (see Supporting material) also exhibits positive variances on income and funding lines. Members will recall from the May report that uncertainty remained relating to the extent the significant levels of income recorded towards the end of the financial year was income in advance of service provision and so appropriately should be carried forward for recognising in 2002/03 rather than the year of receipt. Analysis and questioning of the parts of the organisation concerned have revealed that the vast majority of income received is bookable to 2001/02 and this has been reflected in this final position. Obviously this demonstrates a weakness during 2001/02 in predicting correct levels of income due for financial reporting. Steps have already been taken to address this for 2002/03 including the creation of partnership cost centres that will allow the explicit matching of income and expenditure during the year. This income stream alone is responsible for over 60% of the favourable variance on business group income.

8. The major contributors behind the positive variance against the Service wide Income budget are the late confirmation of the ability to recognise over £5m of income derived from Criminal Records Bureau activity, higher than budgeted levels of rents receivable (mentioned previously), the grants relating to the DNA Expansion Programme and Action Against Drugs and police pension contributions. There was also marked improvement in cost recovery towards the year-end especially in the area of seconded officers.

9. Funding improvement derived from two sources. Firstly the requirement to apply specific income in advance brought forward from 2000/01 that originally had been assumed to have been appropriate for rollover into 2002/03. Secondly, due to police recruitment success and the mechanisms of the grant itself, more funding than forecast was received through the Crime Fighting Fund.

10. Detailed review of the outturn is being undertaken which will inform both the monitoring of the 2002/03 budget and the preparation of the 2003/04 budget.

Expenditure reserves/provisions

11. The 29 May report detailed a number of proposed provisions particularly in relation to third party claims, pensions and bad debts. A number of issues which were outstanding at that time have now been resolved and are dealt with in the following paragraphs.

12. During the audit of the 2000/01 accounts the District Auditor (DA) had raised the issue of when the tax liability in respect of Compensatory Grant payable to pre-Sheehy officers should be recognised. Further discussions with the DA indicate that he expects recognition to be earlier than our existing accounting policy dictates. Within the flexibility provided by the outturn position for 2001/02 an appropriate provision of £4million has therefore been created and is contained within the overall position stated in paragraph 3. There is an added advantage in this change of policy in that, over time, it should reduce in-year budget pressure as the number of officers in receipt of this allowance drops through retirement.

13. The Finance Planning and Best Value Committee has previously indicated an agreement in principle to allowing boroughs to carry forward a tranche of their underspending to future years in recognition of their contribution to managing the overall budget position in 2001/02. The 2001/02 position is complicated due to the level of unbudgeted income and expenditure from counter terrorism and partnership activity. However, Territorial Policing as a business group did record an underspend against their devolved budgets taking account of these two issues. Accordingly the sum of £320,000 has been placed in an ear-marked reserve to be carried forward in 2002/03 which will be available for TP management to allocate to BOCUs on a non-recurring basis. This supports the move to devolution and rewards improving financial management at the local level.

14. Members will also be aware that a need has been identified for contingency provisions in relation to PFI contracts. As operational requirements change subsequent to the finalisation of such contracts, there are likely to be financial implications resulting from changes that are deemed necessary. It is difficult to budget for these instances but the requirement to hold some type of contingency does support the creation of an earmarked reserve specifically to deal with such events. It would of course be reviewed annually as are all provisions and reserves. The Treasurer has already recommended charging 2001/02 with the additional revenue costs arising from changes to both the Firearms Facility PFI and the PFI for South East London facilities. The action now taken has been to create a reserve of £1m specifically for PFI contingency implications which will be used to fund the additional one-off charges from changes already approved and any further changes that may be required over the lifetime of the contractual agreements. To date approval has been given to change both PFI arrangements under contract resulting in approximately £420,000 of this reserve already being committed.

15. Finally provision of £600,000 has been made to deal with the likely costs arising in 2002/03 arising from the MPS response to the proposals relating to disposal of the Hayes Repository and the resultant PFI scheme led by the MoD.

16. The following table summarises the key provisions and earmarked reserves which will appear in the final accounts at 31 March 2002.

Note: 
P = Provisions
ER = Ear Marked Reserve
The final determination of type has yet to be agreed with Auditors.

17. A number of other provisions have been made in the accounts to reflect movement of resources between 2001/02 and 2002/03 and to recognise potential legal liabilities.

Final accounts

18. Subject to the Committee's views on the final adjustments set out in this report, draft final accounts will now be provided to the external auditor so that he can commence the audit. The draft accounts will be reviewed by the Audit Panel in September before being presented to the Authority at its meeting on 26 September 2002 for approval prior to audit. The auditor's opinion and his annual audit letter will be available before the end of the calendar year. Clearly figures, or their presentation, may need to be amended as a result of the audit.

C. Financial implications

As set out in the report.

D. Background papers

MPS Close-down Files 2001/02.

E. Contact details

Report author: Bob Alexander, MPS.

For information contact:

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

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