2003/04 draft budget submission

Report: 03
Date: 14 October 2002
By: the Treasurer and Commissioner

Summary

This report introduces the draft budget submission for 2003/04. It identifies progress in closing the funding gap set out in reports to the Committee and full Authority in July 2002. Specific issues for member decision are identified so that the Committee can make recommendations to the Authority.

A. Recommendation

1. To note the estimate changes since the July report which have reduced the funding gap to £64.9 million.
2. To agree to include in the grant forecast a distributional gain of £20 million whilst recognising the risks arising from the uncertainty around the grant position as a whole.
3. To agree the provision for 1,000 additional officers to be funded from the precept in accordance with the Mayor’s guidance.
4. To note the precept increase of 22.9% arising from the application of the Mayor’s guidance.
5. To agree that the grant uncertainty would justify including an unfunded margin, of no more than £10 million, in the submission, to be addressed in December in the light of the grant settlement.
6. To agree the inclusion, from the list of potential new initiatives, of rape havens, MPA deputy clerk/policy officer and MPA crime and disorder partnerships, with all other new initiatives, other than additional police officers, to be reconsidered in December following the grant settlement.
7. To note that a potential £18.2 million savings have been identified to date, that are subject to formal approval by the MPS Management Board and agree the Treasurer’s advice that a further £6.5 million of savings is required to bring the funding gap to an acceptable level at this time.
8. Subject to the above to recommend approval of the submission by the Authority.

B. Supporting information

Timetable

1. In accordance with the timetable set by the Mayor the MPA has to submit its draft budget for 2003/04 by 15 November 2002. The draft submission will be considered initially by Finance Committee who will make recommendations to the full Authority meeting on 31 October. Following the Authority’s approval there will be an opportunity for further fine-tuning by the Finance Committee on 14 November before the final submission.

2. The draft budget will need to be reviewed in the light of the grant settlement for 2003/04 which is expected to be announced at the end of November. The Mayor will then formally consult on the consolidated budget before presenting his draft proposals to the London Assembly in January with the final budget approval at the Assembly meeting on 12 February 2003.

Guidance

3. The budget submission has been drafted in accordance with the Mayor’s guidance. The guidance covers the content and format of the submission, the Mayor’s objectives, his initial precept intentions and the timetable.

4. The principal contents of the submission are:

• The revenue budget for 2003/04 and a three year forecast
• A business plan
• A budget and equalities submission
• A five year capital spending plan

5. As far as possible detailed information has been included in the draft submission enclosed with this report. The purpose of this covering report is to set out the overall framework and highlight decisions required of members.

6. The draft submission remains incomplete. In particular the section on equalities and the capital spending plan are not yet included. Where possible additional information will be provided to the Committee. In any case the Chair of the Equal Opportunities and Diversity Board is being consulted on the appropriate process for ensuring that members endorse the equalities submission. If necessary the capital spending plan could be approved by the Finance Committee at its next normal meeting on 24 October.

Initial budget position

7. In July 2002 the Finance Committee and the full Authority received a report on the medium term financial projections 2003/04 to 2006/07, including an initial position statement for the 2003/04 budget. Appendix 1 (see Supporting material) to this report summarises the position as reported at that stage.

8. The expenditure projections for 2003/04 included an allowance for pay and price increases, committed growth, a further increase in police officers to comply with the Mayor’s objectives, other new initiatives and firm identified savings. The total expenditure increase at this stage was £279 million, or 13.1%. Of this increase, some £88 million was covered by matching grant, and a further £85 million fell within the Mayor’s precept envelope.

9. Grant funding was estimated on the basis of information available at the time, in advance of clear information about the implications of the Government’s revised spending plans (SR2002) and making no assumptions about the outcome of the grant formula review. The resulting overall grant increase of 6.9% was largely driven by assumptions about earmarked funding to match specific expenditure increases.

10. The precept was assessed on the basis of the Mayor’s guidance to ensure the maximum increase in police officer numbers in 2003/04 subject to capacity constraints. A potential increase of 23.5% resulted from this assessment.

11. Appendix 1 (see Supporting material) shows that the effect of combining the expenditure, grant and precept projections was a funding gap of £72 million. This gap would have to be eliminated in the final budget submission and the July report identified four broad options which could contribute to this:

• Increased grant
• Increased precept
• Savings
• Reductions in planned expenditure

12. The current position has been given preliminary consideration at an informal member workshop on 4 October and views have been reflected in this report where appropriate.

Expenditure review

13. As a first stage all the expenditure items in the MTFP have been reviewed to ensure that the estimates reflect the most up to date information available. During the review the MPS has positively resisted pressure to include any further growth. The amendments include the incorporation of the MPA direct budget which was approved by the Coordination and Policing Committee on 4 October 2002.

14. The outcome of the review is summarised in Table 1 below, showing the impact of these changes on both the funding gap and the implied precept. A schedule of movements for each of the MTFP items as they affect 2003/04 is included at Appendix 2 (see Supporting material), with a brief explanation of the reason driving the change.

Table 1

15. These expenditure changes therefore contribute towards the funding gap by £7.4m, together with a reduction in the precept requirement by £2.3m (0.6%).

Revised funding gap

16. Table 2 shows the revised funding gap following the expenditure review.

Table 2

Grant

17. The position on grant funding remains extremely unclear. There has been no further announcement from the Home Office on the implications of SR2002 since the very high level, incomplete and actually misleading announcement immediately following the Chancellor of the Exchequer’s statement in July. The position may not be fully clarified before the settlement announcement at the end of November. At this stage there are no grounds for assuming that the overall resources available to police authorities will improve on the relatively pessimistic assumption underlying our July forecast. In fact there is a risk that the position might deteriorate. 

18. Furthermore there are significant issues in relation to earmarked funding. Firstly there is uncertainty over the continuation and level of existing funding received by the MPA. Secondly lack of information about the extent of earmarked funding nationally compounds the uncertainty about the total resources available for distribution to police authorities by way of the grant formula.

19. The consultation on the grant formula review was reported to the Finance Committee on 27 September. The most likely option for implementation in 2003/04 would give the MPA a gain of £27 million. Other options may also be implemented some of which could erode that gain. Furthermore we need to bear in mind the downside risk in relation to total police resources referred to in paragraph 17 above. Initial information in relation to the 2001 Census population data suggests that we could lose around £8 million when that is introduced into the 2003/04 grant distribution formula. Nevertheless it is suggested that we take a calculated risk and build into our grant forecast at this stage a distributional gain of £20 million.

Precept

20. The Mayor’s proposed precept increase covers

• A contribution towards inflation
• The full year cost of additional officers recruited this year
• The part year cost of additional officers recruited next year up to the maximum possible subject only to capacity constraints
• Real terms growth in pension costs

The effect of the expenditure review reported at paragraphs 13-15 above is to reduce the projected precept increase from 23.5% as reported in July to 22.9%. The position is summarised in the following table.

Table 3

21. Table 3.4 in the draft submission sets out the latest position on officer recruitment requirements in 2003/04 and shows that 1,000 additional officers could be available to be funded from the precept. This compares with the forecast in July that included 900 met from the precept.

22. In July the Finance Committee, in its views reported to the full Authority, expressed reservations about the level of the precept increase even just applying the Mayor’s guidance and did not support representations being made for inclusion of further items of expenditure within the precept envelope. Consequently no consideration has been given to the possibility of any contribution from this source to closing the funding gap.

23. However, Members should be aware that the MPS Management Board consider that the increased cost of the employers national Insurance increase (effective 1st April 2003) of £11.7m could be justifiably included within the Mayor’s funding envelope, but has been excluded from the precept increase calculation. The impact of the Finance Committee’s previous decision is to require the cost of this increase to fall to the MPS to fund by budget reductions if it cannot be met within the general grant allocation.

24. Similarly, the additional PFI costs in 2003/04 amounts to £14.2m. Members will be aware that the MPA inherited a situation where no PFI credits had been attached to these schemes. A request was made unsuccessfully for such funding last year. PFI credits are regularly awarded to local and police authorities for qualifying schemes, and in the absence of this funding, the cost is effectively being met by budget reductions.

Consequences of officer growth

25. Members will be aware of the considerable operational pressures that the MPS works under, together with high Government and public expectations. The need to ensure that financial and operational plans are brought together must be addressed through the development of the Policing Plan in conjunction with the Medium Term Financial Strategy.

26. Members will also be aware that there are significant tensions between:

• the implications of growth
• the imperative to improve effectiveness, and
• the requirement to make savings.

27. As police numbers increase the numbers of police and civil support staff need to be kept in balance to maximise the effectiveness of operational policing. Indeed the growth of 1,000 officers funded by the Mayor’s proposed precept increase recognises (in addition to pay related items) the contingent costs of some additional civil support staff. This principle is supported by the interim findings of the Accenture Civilianisation Review: without an increase in civil support staff numbers proportionate to the growth in officers, a large proportion of those extra officers will not be available for operational duties.

28. However the continuing growth towards the Mayoral aspiration of 35,000 officers will have a substantial impact on MPS physical infrastructure. Work is in hand to examine these implications, as there will come a point at which the current infrastructure, including accommodation, simply cannot sustain the increase in officer numbers. Members should be aware that there has been no commensurate increase in capital allocations to reflect the impact of officer growth.

29. The MPS review of this issue will have to be considered by the Authority in the context of the medium term financial plans.

2002/03 savings

30. Currently, the MPS is on target to achieve £60m savings for the year 2002/03. As a result 46 separate saving themes are being progressed. Excluding police pay and pensions and contractual payments, the short term ‘reducible budget’ from which these savings could be made was about £600 million i.e. an effective savings target of 10%.

31. The requirement to make savings has led to an effective ‘de-civilianisation’ of civil staff roles. The savings in the current year include a reduction of £10m in civil staff budgets. This has been managed largely through increasing the vacancy factor, which has led to an increase in the number of police officers performing roles previously undertaken by civil support staff. Only some of these officers have been on recuperative or restricted duties: many have been redeployed from operational roles. The effect has been felt most keenly on boroughs, and has resulted in Territorial Policing being unable at this stage to identify any savings in 2003/04 (see below).

2003/04 savings

32. The challenge to find savings to contribute towards closing the gap for 2003/4 is even greater than the current year. The savings made in the current year has reduced the base against which further savings can be achieved. Options have to be found beyond those delivered in previous years.

33. It is proving extremely difficult to realise additional savings in 2003/4. The two most significant items in the ‘reducible budget’ are civilian staff (£300m) and police overtime (£90m). Civilian support reduction will lead inevitably to further ‘de-civilianisation’ of roles as described above. Police overtime is already subject to a reduction as part of PNB settlement.

34. MPS Business Groups have been tasked to identify 3% savings from their ‘reducible budgets’. A summary of potential savings identified is included in table 4 below, with more substantive detail included at 3.11 of the Draft Budget Submission to the GLA. All Business Groups have made detailed proposals apart from Territorial Policing. The MPA’s own budget does not include any savings proposals.

35. The Director of Finance is currently validating all savings proposals. Similarly, none of the budget proposals have at this stage been formerly approved by the MPS Management Board in terms of acceptable operational impact and so must be treated with caution.

Table 4

Note the Budget Change Team is currently reviewing £4m of the total £18,178; all savings are being validated by the Director of Finance

Review of new initiatives

36. Following the expenditure review the proposed new initiatives, excluding additional officers, are set out in Table 5 below. Detailed statements supporting each line are included in the draft submission (Schedule 3.9).

Table 5

37. Members should be aware that the items in Table 5 represent the additional costs of new initiatives where it has not been possible to absorb these within the base budget. A number of other costs pressures have been excluded at this stage, which are themselves leading to re-direction of existing budgets:

• Reduced police overtime arising from the PNB settlement (costs still being quantified)
• Increased counter-terrorism costs over and above the level of specific government grant funding (£11m)
• Early roll out of Mobile Data Terminals for Airwave Project (£3m)
• Further costs arising from the impact of the HAY review of civilian support staff (£2m)
• Additional costs identified recently as part of the ongoing review of the impact of Congestion Charging (£1m)
• Other smaller items including accommodation etc. (£3m)

38. It is proposed that, in view of the need to reduce the funding gap to manageable proportions, all new initiatives are excluded from the budget submission except where members are prepared to make firm commitment or timing is critical. All other options can then be reconsidered in December following announcement of the grant settlement. Three items were provisionally identified for inclusion at the informal member workshop on 4 October as follows:

39. MPS Management Board have welcomed the support for Rape Havens and support the need for a Deputy Clerk with legal experience as identified in the District Auditor’s Management Letter. However, there is concern that Member support for Crime and Disorder Partnerships should take precedence over the extra costs of Child Protection estimated to arise from the Climbie Enquiry.

Progress in closing funding gap

40. The following table summarises the position in closing the funding gap.

Table 6

Conclusion

41. Taking account of potential savings so far identified (which are still subject to formal ratification) and assuming no deterioration in the grant position, there is a remaining gap of £16.4 million.

42. There remains substantial uncertainty around grant for 2003/04. In particular the position is uncertain in relation to:

• The total resources which will be available nationally for the police service
• The extent of earmarking of grant.
• The distribution arrangements.

As a result it is impossible to make a confident prediction of the final grant position. This uncertainty may remain until the end of November.

43. In these circumstances the Treasurer’s advice is that it could be acceptable at this stage to have an unfunded gap of no more than 0.5% of the budget, i.e. £10 million. However this would have to be supported by the development of contingency plans identifying how the budget would be amended to reduce by up to 1% to allow for the downside risk on grant. If the position proved better than anticipated then new initiatives excluded at this stage could be reconsidered.

44. On the basis of the figures set out in this report, and decisions made previously by this Committee, the Treasurer would further advise that a further £6.5 million savings needs to be identified for inclusion in the submission. This will have to be completed in time to be reported to the Authority on 31 October.

C. Equality and diversity implications

These will be specifically addressed in the equalities section of the budget submission.

D. Financial implications

These are set out in the report.

E. Background papers

MPA/MPS Budget Files

F. Contact details

Report author: Peter Martin, MPA.

For more information contact:

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

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