Medium term financial projection 2003/04 to 2006/07

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

Summary

On 18 April and 29 May this Committee received reports setting out the process and context for the preparation of the Medium Term Financial Projection 2003/04 to 2006/07 and identifying some of the major financial issues confronting the Service. Further internal scrutiny of the remaining items has now been completed. This report sets out the overall position and provides details of any changes to the items included in the two earlier reports, and information about the remaining items identified by the Service. The report also considers the implications of the Mayor's budget guidance and identifies issues for further dialogue with the Mayor. The Committee is invited to endorse the provisional Medium Term Financial Projection as the planning framework within which the detailed budget preparation for 2003/04 will take place.

A. Recommendations

It is recommended that:

1. The GLA's budget guidance and timetable be noted.
2. The provisional Medium Term Financial Projection be approved as the financial planning framework within which the detailed budget build for 2003/04 will take place, linked to the MPA's Corporate Plan 2002-2007 and Policing Plan 2003/04.
3. The Committee consider and comment on the overall financial pressures included in the projection, with particular attention to the implications for the 2003/04 budget and precept.
4. The Committee consider the potential funding gap identified for 2003/04 and the means of closing it, particularly the recommendations of the MPS SMT in paragraphs 39,41 and 42, and the need to explore fully the scope for savings.
5. In the light of the above the Committee determine any specific recommendations it would wish to make to the full Authority.

B. Supporting information

Background

1. The medium term financial projection provides the planning framework for the 2003/04 budget. The projections presented in this report roll forward the plans to 2006/07. A medium term financial plan is required by the Mayor to be included with the budget submission for 2003/04. It will be reported for endorsement by the Authority at its meeting on 25 July 2002 and will continue to be refined as the detailed budget preparation for 2003/04 proceeds.

2. The Finance Planning and Best Value Committee received two reports on the preparation of the medium term financial plan. The first report on 18 April 2002 set out estimated budget commitments over the plan period and provided an estimate of grant funding. The second report on 29 May 2002 described the scrutiny process within the MPS for reviewing proposed budget developments. It also provided an update on changes since the previous report which would affect the budget commitments. The present report builds on the information contained in these two earlier reports.

3. Since the last committee report on 29 May the Mayor has issued his guidance for 2003/04 budget submissions. The MPS has completed its scrutiny and validation of expenditure commitments and developments for consideration for inclusion in the medium term financial plan. At the time of writing we are still awaiting the publication of the results of the Government's latest spending review (SR2002) which will give a preliminary indication of grant levels for the next three years.

Budget guidance

4. A copy of the Mayor's budget guidance was circulated to all members of the MPA on 17 June 2002. The following paragraphs provide a summary of its key points.

5. The four key elements of the budget submission are:

• a budget plan for the three years 2003/04 to 2005/06 with supporting analysis and explanation
• a business plan covering at least the period to 2005/06
• a budget and equalities submission
• a capital spending plan for the five years 2003/04 to 2007/08.

6. In developing business plans and budgets for 2003/04 there is a general requirement as far as practicable to address the objectives set out in the Mayor's Vision. More particularly, for the MPA the Mayor has set out the following policy objectives to be addressed in the budget submission:

• Increase the number of police officers to the maximum extent that is reasonably practical (eg 1,500 subject to Hendon capacity)
• Work co-operatively and in partnership with TfL to extend the Transport Policing Initiative
• Maximise the number of officers engaged on operational policing
• Implementation of recruitment and selection practices that deliver substantial progress to a representational workforce (in particular for operational officers).

7. The format required for budget plans follows that which has been developed over the last two years. Changes in budgets are to be analysed into the following categories:

• Inflation
• Committed service increases
• Committed service decreases
• Efficiency and other savings
• New initiatives
• Real terms changes in fees and charges
• Real terms changes in unfunded pensions
• Changes in specific grant
• Any other reasons.

8. The Mayor has decided to set minimum cash savings targets for 2003/04. This has been done by defining what the precept increase will cover. It is recognised that the resulting savings requirement will be affected by grant changes as well as decisions on expenditure and the targets will be kept under review in light of emerging details of levels of government support. For the MPA the minimum savings target is defined as the level of efficiencies and savings which would allow the police component of the GLA precept to be restricted to:

2002/03 police component of the GLA precept

• + inflation of 2.5%
• + full year costs of 2002/03 additional police officers
• + part year costs from recruitment in 2003/04 of additional police officers
• + real growth in pensions costs.

9. The budget process will be managed through a series of meetings between functional bodies and the Mayor together with officer level meetings.

10. Functional bodies are being asked to be involved in consultation with stakeholders prior to submission of the budget and an approach will be agreed with each body by the end of July.

11. The deadline for submission of the MPA draft budget has been agreed as 15 November 2002 which will allow consideration by the full Authority on 31 October with final adjustments agreed by the Finance Committee on 14 November.

Expenditure forecasts

12. The process for preparation of the expenditure projections has been 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).
• The undertaking of a corporate review of the base budget position, re-visiting the assumptions and information that supported the build assumptions.
• 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 was the basis of the April report to the Committee.
• The undertaking of internal scrutiny and validation on the responses received from the Service.
• 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.

Internal scrutiny and validation

13. The items identified as part of the Service-wide exercise were categorised on the basis of their status as follows:

• Category A - Statutory
• Category B - Contractually committed
• Category C - Implementation of existing policy
• Category D - Implementation of new policy.

14. The items in all categories have been subject to further investigation and analysis. The Commissioner's Senior Management Team set in place the following two-stage protocol to address this requirement:

Stage 1: the Business Managers' Forum - an internal management and review body with representation from all business groups across the Service – was asked to perform an initial assessment of the new items against the following criteria.

• Items to be included in the MTFP on the basis that the assumptions made by business groups are sound, robust and justifiable.
• Items where it was felt that proposals would benefit from the provision of additional information.
• Items which were not able to be supported.

Stage 2: the outcome of Stage 1 has been subjected to a broader strategic review conducted by the Director of Resources and each sponsoring member of the Commissioner's SMT.

Both Stages 1 and 2 have now been completed.

MPS SMT has steered the development of this report, and the final version presented has been approved by MPS SMT for submission to the MPA.

Assumptions

15. The technical assumptions originally included in the report to the FPBV Committee on 18th April ('Medium Term Financial Projection – Interim report') have been summarised in Appendix 1 for purposes of this report.

16. In addition the following headline assumptions are drawn to attention:

1. 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 (£49m in 2002/03) is sufficient to cover the Service's costs.
2. That the cost of the new Transport OCU remains cost neutral throughout the period.
3. No PFI credits will be made available for existing PFI schemes.
4. That there will be no change in the method of funding police pensions.
5. That savings in overtime delivered in meeting the 15% target reduction in three years set as part of the police reform package will be reinvested in extra officers.
6. At this stage in the process only specifically identified savings have been included.

Outcome of the scrutiny process

17. The information resulting from the process outlined in paragraph 12 is presented as follows and summarised in Table 1:

• Appendix 2 Part 1 – a list of the corporate pressures which are either unavoidable (e.g. police pensions growth) or reflect previous MPA decisions (e.g. C3i officer growth (800 officers), 1000 additional officers in 2002/03). Most of the items shown were reflected in Table 1 of the FPBV Committee report considered on 18 April 2002. Any additions are explained in the notes to the Appendix.
• Appendix 2 Part 2 – A summary of the Service pressures identified by business groups that Management Board believes are soundly based and should be incorporated into the projection in order to obtain members' support and views on relative priorities. Although sourced from all parts of the organisation they have been presented on a thematic basis that groups those of a broadly similar nature.
• Appendix 2 Part 3 – a list of items the Service would wish to adopt if external funding were to be forthcoming.

Table 1: Summary of (i) corporate factors and (ii) those financial pressures considered to be soundly based. (figures are shown on an incremental basis)

Key expenditure issues

Police officer numbers

18. A key objective in the Mayor's guidance is to make provision for the maximum practicable increase in police officer numbers, subject to capacity constraints, to be funded either through the precept or via TfL.

19. MPS SMT currently consider that the realistic recruitment capacity for the MPS during 2003/04 is 3,000 officers. However, this recruitment would need to meet a number of competing demands. In considering this recruitment level, it is MPS's view that they could expect to apply this recruitment capacity as follows:

Note: The figures shown above are provisional at this stage. The wastage level in particular will need to be kept under review. It is intended to revisit the position before the final budget submission is made to the GLA.

20. In determining this level of capacity the MPS has taken into account current expectations on the demand for PCSO training, and the requirement for skills development of existing officers.

21. In arriving at the cost of the additional 900 officers, the following categories of costs have been considered and the full and part year costs calculated. These costs are both at 2003/04 price base and assume (as in previous years) that in the first year the growth is only 50% funded representing a gradual recruitment over the year. Those costs included which are enabling step change are included in full from the first year.

Review and re-let of outsourced contracts

22. Members considered an exempt paper at the FPBV Committee meeting on 18 April 2002 that gave details of the possible timing of reviewing and extending or re-tendering the existing outsourced contracts. All the existing contracts will need to be re-tendered during the period covered by the medium term projections. Experience when the contracts were originally outsourced suggests that considerable specialist, consultancy and legal advice will be required to ensure this process is completed successfully and with minimal disruption to the smooth running of the Service.

23. A summary of the costs associated with the review and re-tendering of outsourced contracts is at Appendix 4. The aggregate cost of the process is estimated to be around £7.4m over the period 2003/04 to 2006/07, of which £3.225m falls in 2003/04. An earmarked reserve of £2m for the re-letting process has been created from the underspend in 2001/02 and this will be used to meet some of the additional costs. In view of the costs in the later years it may be appropriate for part of any future underspends to be earmarked to boost or replenish the earmarked reserve, and/or reconsider the timetable for re-tendering.

Criminal justice developments

24. The Service faces considerable pressures associated with the drive to improve all parts of the criminal justice system and a major conference was hosted by the MPS in the week commencing 17 June at which the Prime Minister and other key figures spoke. There are a number of major strands in an extensive programme of work that are likely to have significant financial implications in the medium term. The most significant of these is implementation of the Glidewell report recommendations about joint working with the Crown Prosecution Service. Professional advice on the investment appraisal for the progressive introduction of the joint criminal justice units is presently being sought; this will provide a clearer idea both of total costs and the likely phasing of implementation. The figures in Appendix 2 Part 2 are therefore the best currently available and will be revised when the MTFP is updated (see paragraph 45 below).

PFI

25. The PFI contracts for South East London, and Firearms and Public Order Facilities will be incurring additional revenue cost from 2003/04. The costs associated with these contracts amount to a £13.7m increase in 2003/04 base budget, with further increases up to cumulative annual cost of £20.8m by 2006/07.

National insurance

26. From 2003/04 the Chancellor of the Exchequer has increased the National Insurance levy to employers. This increase has been costed at £11.7m p.a. effective from 2003/04 and is included at Appendix 2 Part 1.

C3i

27. The C3i project is now proceeding following agreement of the terms of the Capital Grant with the Home Office. The revenue implications are included in the report in two places:

1. The revenue costs associated with the revised business case which is included in Appendix 2 Part 2 under 'Implementation of Major Projects'.
2. The police officers retained following implementation of C3i to meet the terms of the protocol will need to be funded before any absolute growth in police numbers. The MPA has undertaken to maintain a commitment to resourcing these posts as the first priority in its annual and medium term financial plans in the protocol for receiving the Home Office Capital Grant. The revenue implications of this are accordingly included under Corporate Pressures at Appendix 2 Part 1.

28. The table below summarises the revenue implications of this project over the period of this projection.

Revenue implications C3i

Net increase in the base by 2006/07 = £24,665k

Grant funding projections

29. The 18th April report set out projected funding profiles which have now been up-dated as set out in Appendix 3, Part 1. Members will recall that latest indications are that the main central funding elements of police grant, revenue support grant and non-domestic rates are expected to rise in the range of 1.5%-2.5% each year. An average of 2% pa has therefore been used in the projections in Appendix 3, Part 1 of this report. Each 0.5% change in the assumption would change the central funding forecast by about £8.5m. The technical assumptions underpinning these projections are contained in Appendix 3, Part 2.

Comprehensive Spending Review

30. The validity of the assumptions will be tested as information begins to emerge about the outcome of this year's comprehensive spending review. This is due to be announced in July 2002, although it may be some time after that before sufficiently detailed information emerges to allow accurate conclusions to be drawn about the total funding available for policing nationally and the methods by which the Home Office proposes to top slice and distribute them. The extent to which initiatives continue to be funded by hypothecated grant will be a significant issue in assessing the degree of police authorities' influence over spending plans.

Budget 2003/04

31. The following paragraphs use the information on the medium term and focus on the implications for the MPA's budget for 2003/04. They draw together the expenditure demands and funding sources to determine a funding gap, options to address that gap, and the precept implied. It is recognised that this is an early estimate of the 2003/04 budget that will continue to develop until the submission to the GLA is approved.

32. The following table summarises the expenditure projections in accordance with the analysis required for the GLA budget submission. This table includes the items at Appendix 2, Parts 1 and 2 of this report, reclassified using the GLA headings. It identifies the extent to which additional grant may contribute to the costs.

Precept forecast

33. The Mayor's guidance on his provisional funding envelope is set out in paragraph 8 above. The precept implications of that guidance is as follows:

2003/04 police component of the GLA precept

361.4

plus 2.5% inflation [on GLA precept only]

9.0

plus full year effect of 2002/03 additional officers

21.1

plus part year cost of additional officers 2003/04

45.7

plus growth in police pension

9.3

Precept limit based on the Mayor's Guidance

446.5

34. There is one issue which requires clarification in respect of the precept calculation. We have, at this stage, included the £15.5m cost of retaining officers released as part of the C3i project in the part year cost of officer growth for 2003/04. This has been included in the projection based on the protocol agreed between the MPA and the Home Office. Although not explicitly identified as part of the allowable precept increase in the guidance, it has been included in the calculation in response to the Mayoral policy objective of maximising the number of officers engaged in operational policing, and also because, if these posts were not funded, it would compromise the Mayor's objective of increasing overall officer numbers.

35. Given the 2003/04 projected net expenditure at paragraph 31 and the evaluation of the precept guidance at paragraph 32 above, the funding gap can be determined:

Increase over 2002/03

Addressing the funding gap

36. The preceding analysis shows that there is a shortfall of funding so far identified for the 2003/04 expenditure reflected in the medium term projections amounting to £72.3 million. This gap between expenditure and funding could be closed potentially by a combination of four options:

• An increase in grant.
• Identification of savings.
• An increase in the precept.
• A reduction in the planned expenditure.

Increased grant

37. The potential for increased grant beyond the current assumptions can only be assessed following the announcement of SR2002 and clarification of its implications for individual police authorities. Subject to the date of the announcement and the amount of information immediately available it may be possible to draw preliminary conclusions for the Authority meeting on 25 July. However, it is likely that the position will remain unclear for some time after the announcement.

Identification of savings

38. The medium term projection only includes at this stage savings which have been specifically identified and validated. No provision has been made for savings arising from the efficiency and effectiveness reviews. Work is continuing to agree a realistic profile of savings which will then be incorporated in the plans and will contribute to closing the gap. Although the reports so far issued by Accenture would suggest a potential for savings up to about £50 million, some savings are already reflected in the 2002/03 budget, others represent savings against expenditure levels that exceed budget provisions and there are significant timing issues around some proposals. The amount that can be saved from this source against the 2003/04 budget will therefore be substantially less than this sum.

39. Given the inclusion of £60 million savings in the 2002/03 budget, a savings requirement in 2003/04 substantially beyond that which can realistically be achieved out of the efficiency and effectiveness reviews will comprise largely budget cuts rather than efficiencies. Nevertheless the potential for savings will have to be fully explored.

Increase in the precept

40. The Mayor's guidance specifies certain items of expenditure increase which he is minded to meet from the precept. It would be possible to argue for other items to be included in the precept funding. The MPS SMT strongly recommends that the MPA, in conjunction with the Commissioner, make representations to the GLA and others that the following be included in deriving the precept limit:

41. The Treasurer's advice is that although the Police Authority is not responsible for setting the precept the Authority should nevertheless consider the precept implications of any proposals. As indicated above (paragraph 32) the Mayor's guidance on the basis of the figures in this report would already represent an increase in the precept of 23.5%. The MPS proposal would be on top of this.

Reduction in planned expenditure

42. The expenditure increases included in the financial plans for 2003/04 are largely committed, or to meet expected pay and price increases or reflect the Mayor's objectives in relation to increasing police officer numbers. The principal scope for reducing the expenditure plans is therefore around the new initiatives. However, there are also examples of commitments where there is still discretion around the quantum or timing. The MPS SMT specifically recommend that the MPA reconsider its previous decision as to the programme of re-tendering outsourced contracts and that the MPS consider the practical implications of amending the timetable to:

• Manage the impact on 2003/04 within the £2 million earmarked reserve.
• Spread the management and financial load over a longer timeframe.

43. The following table lists those items included in Appendix 2 Part 2 which represent the further implementation of existing policy or new initiatives. The MPS SMT considers that all these items are necessary for the adequate execution of the MPS's responsibilities. However, the MPS SMT invite the Committee to consider each of these items to determine which, if any, should be excluded from this projection and the budget for 2003/04.

Conclusion

44. The medium term financial projections are the first stage in the development of the budget for 2003/04 which will continue through to the draft budget submission in mid-November. At this stage there remain significant uncertainties, especially in relation to grant, but also over the level of achievable savings, the interpretation of the Mayor's guidance, etc. The figures set out in this report therefore need to be treated as work in progress and as a basis for further dialogue with the Mayor.

45. Members' views are sought particularly on:

• The items included in the medium term projections.
• The potential level of the precept.
• The specific recommendations from the MPS SMT set out in paragraphs 39, 41 and 42.

46. In the meantime work will continue to:

• To develop the detailed draft budget for 2003/04.
• To refine the medium term projections.
• To clarify the grant position for 2003/04 and the subsequent two years.
• To explore fully the scope for savings in 2003/04 including those arising from the efficiency and effectiveness reviews.

47. This report, together with information about SR2002, will be considered by the full Authority on 25 July 2002. The Committee is invited to consider any specific views or recommendations it would wish to pass on to the Authority.

C. Financial implications

The financial implications of this report are set out above.

D. Background papers

• MPS medium term planning files
• Reports to FPBV Committee on 18 April 2002 and 29 May 2002 'Medium Term Financial Projection – Interim Report'. And 'Medium Term Financial Projection – Update'.

E. Contact details

Report author: Keith Luck, MPS and Peter Martin, MPA.

For information contact:

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

Appendix 1: Summary of technical assumptions

This Appendix contains a summary of the technical assumptions set out in the text of the 'Medium Term Financial Projection – Interim Report' – Finance Planning & Best Value Committee agenda, 18 April 2002, Agenda Item 13.

Part 1: Corporately reviewed factors

• The impact of the Police Reform agenda on police pay and allowances (insofar as these can be foreseen at this time). It is assumed that the additional costs will be fully matched by extra funding from Central Government although the intention and route for such funding have yet to be confirmed. It is assumed that the savings in overtime for which a three year target of 15% has been set, will be reinvested in additional officers.
• 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 a pending the actuarial review.
• Transfer of civil staff pensions to the Civil Service scheme in September 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.

Part 2: Technical assumptions pertaining to finance projections

• 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 its incorporation into the MTFP agreed in due course.
• 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
• 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.

Part 3: Factors excluded from the finance projections

The projections specifically exclude the following:

• 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 new CSO's will be externally funded.
• No proposals are included in respect of additions to the Authority's financial reserves. Reserves policy was considered by the Committee at 21st February 2002 meeting. The position will need to be reviewed in the light of the 2001/02 outturn.

Send an e-mail linking to this page

Feedback