Provisional revenue outturn 2002/03

Report: 06
Date: 9 June 2003
By: Commissioner and Treasurer

Summary

This report provides the latest information on the revenue outturn position for the financial year 2002/03, and considers proposals for dealing with the qualification items from 2001/02 and the transfer of monies to appropriate provisions and reserves.

A. Recommendations

The Committee is asked to:

1. Agree that the 2002/03 underspending should be used a) to maintain the 1% general reserve, b) to provide for prudent earmarked reserves, and c) to set aside provisional sums to meet identified budget pressures.
2. Note the intention to report in July on the scope for meeting budget pressures within the 2003/04 budget thus releasing all or part of the provisional sums set aside for this purpose.
3. Agree to review the position at the July meeting in the light of the final outturn and the review of the 2003/04 budget.

B. Supporting information

Overview

1. The revenue outturn position for 2002/03 reported to members in April indicated a forecast underspend to year end of £24.0 million. Members are reminded that this position excluded a sum of £3.6 million held as the MPA contingency which, if unused, would be transferred to reserves in accordance with a previous Finance Committee decision. Together this gave a combined projected underspend of £27.6m.

2. During April and May, the MPS has been following a detailed project plan to deliver a set of financial statements for the Authority to statutory timescales. At the time of compiling this report some final accounting adjustments remain to be made. However there are no issues yet identified that would indicate a threat to the underlying position reported in April. It is proposed that the final outturn will be submitted to the 10 July Finance Committee.

3. At this stage the provisional outturn position is in the region of £25.5m after the inclusion of the MPA contingency. This represents approximately 1% of the revenue budget for the year.
Provisions.

4. Members will be aware of the primary reasons behind the qualification of the accounts for 2000/01 and 2001/02, namely the inadequate provisions to support the potential third party and pensions liabilities. A key feature of the closure of accounts has been the need to ensure that the provisions established are enhanced to a level that will meet the District Auditor’s approval. Discussions have been held with the Auditor and he has indicated (without fettering his discretion) that in order to remove the qualification he will require the pension provision to recognise 75% of the potential liability.

5. On third party liabilities, a considerable amount of work has been carried out during the year, identifying the nature of the liabilities outstanding and their value. This work has reduced the estimate of the outstanding claims, and ensured that a robust process is in place to deal with this issue in the future. The process has been quality assured by our insurance advisers, Willis, who conclude that ‘overall and in principle the methods employed by (the MPS) departments to calculate outstanding liability for accounting purposes are reasonable given the starting point in 2001.’

6. Overall, with the work carried out in re-assessing the quantum of third party liabilities and the clarification of the external audit requirements, the sums required to transfer to these provisions are some £12m lower than the full liability identified in the 2001/02 accounts. As a result it is now possible to meet the provisions requirements out of underspendings against the original budgets for police pensions and third party claims. These underspendings had already been earmarked for this purpose and were not reflected in the overall reported underspending.

General reserve

7. The Authority’s policy is to maintain a general reserve to meet unforeseen or emergency expenditure which cannot be contained within the agreed budget at a minimum of 1% of net budgeted expenditure, provided that there are adequate accounting provisions and earmarked reserves, reasonable insurance arrangements, a well funded budget and effective budgetary control. These conditions are closer to being met than at any time since the Authority was established. The general reserve currently stands at £22.3 million. Net budgeted expenditure for 2003/04 is £2,411.7 million. To maintain the 1% minimum therefore the general reserve should be increased by £1.8 million to £24.1 million.

Potential transfers to earmarked reserves

8. As part of the closure process a number of issues have emerged where it is considered prudent to either establish or enhance existing provisions or reserves. (The precise nature of how the items will be accounted for will be determined as part of the next phase of the final accounts preparation.) These include:

• Police pensions reserve – A separate report on the Committee’s agenda sets out the conclusions of the independent actuarial review of future police pension costs. It is proposed that an earmarked reserve should be established to mitigate the future cost of lump sum commutations. By effectively ‘ring-fencing’ the pensions budget, and thus setting aside the residual surplus in 2002/03 (£4 million) the MPA can commence this reserve at this stage.
• Capital Programme – Members will be aware of the continuing pressure on the Capital Programme as a result of limited and reducing capital resources. Approval is sought to supplement the available resources by a one-off injection from revenue. This will enable either additional projects to be included, or to bring forward in time much needed schemes that have had to be delayed due to a shortfall in funding. (A full report on the Capital Programme was considered by the Finance committee at its April meeting). An amount of £4 million would restore the uncommitted capital reserve to the agreed prudent level of £10 million.
• Estates/accommodation issues – Reports have been brought to members highlighting the need to enhance and expand the MPA’s Estate to reflect the changing nature of policing and need to cope with the increase in numbers of police and support staff. Many of the schemes have been included in the restated Capital Programme approved by Finance Committee on 10th April (Report 11 refers). However there are also consequential costs in terms of fitting out, IT installations etc to enable such moves to happen which will place great pressure on existing IT and Property Services budgets. Setting aside a limited one-off resource will enable Property Services and DoI to manage these moves effectively. Further reports will be brought as schemes come on stream but an initial assessment suggests that a sum of £4 million would be appropriate.
• Resources systems - There is an urgent need to incur one-off costs to upgrade the MetFIN system in 2003/04 in order to maintain technical support from the supplier (SAP) while taking advantage of the enhanced functionality now on offer. There is also a need to fund further enhancement of MetHR. A sum of £1 million would meet these requirements and whilst they could be prioritised within existing IT development budgets their late inclusion would impact adversely on a number of key operational systems.
• Carry forward of devolved underspend - The Committee in the past has supported the concept of allowing those Boroughs and Units that have contributed to the overall favourable financial position to carry forward a proportion of the underspend. With the advent of pathfinders and the extension of devolution an analysis needs to be completed that rewards budget holders for their management action – yet reflects the overall position. It is proposed that a provisional sum of £3 million be earmarked for carry forward of underspend on devolved budgets as per the MPS’s Scheme of Devolved Financial Management to be confirmed at July’s meeting.

9. The total of these proposed transfers to earmarked reserves is £16 million.

10. Earmarked reserves totalling £9.4 million were created following the 2001/02 outturn. Expenditure has been incurred against some of these reserves and initial examination suggests that the remaining balances still need to be maintained. Further details will be provided in July.

Budget pressures

11. A number of budget pressures have emerged since the budget was submitted by the MPA in December 2002 and agreed by the Mayor and Assembly in February 2003, and these require funding to be identified in 2003/04. Where such pressures represent an ongoing expenditure need it is preferable to fund them by permanent adjustments to the budget which can then be continued in future years. It is intended to carry out a high level budget review, with the benefit of lessons from the 2002/03 outturn in order to identify opportunities to fund pressures within the 2003/04 budget. Initial results will be reported to the Committee in July. In the meantime potential sums need to be earmarked from the underspending subject to the outcome of the 2003/04 budget review. The following pressures have been identified.

• Accelerated police officer recruitment - To part fund the accelerated recruitment of Police Officers in 2003/04 as approved by the Authority at its meeting on 27th March 2003. Members agreed the proposal and requested Finance Committee to determine the funding for the estimated additional cost of £6 million. It is anticipated that half of the necessary funding could be made available from within the 2003/04 budget with the remaining funding (£3 million) provisionally being sought from the 2002/03 underspend.
• Police Officers Free Rail Travel - The arrangements for police officers free rail travel have been renegotiated as reported to the MPA on 29 May 2003. On the basis of the reported figures the additional costs and associated tax implications would be around £5 million in 2003/04. This amount should be provisionally reserved out of the 2002/03 outturn. The ongoing costs in future years will be considered within the Medium Term Financial Plan in due course.
• PCSOs – The Home Office has recently confirmed an offer of £1.9 million grant towards the recruitment of PCSOs in 2003/04. This falls short of the expected funding to match the Authority’s budget provision of £2.5 million. The Authority’s budget was based on recruiting 500 PCSOs in the second half of the year. The MPS will have to consider how the Authority’s objective can be achieved but this is likely to require some additional funding. Again a provisional sum of £0.5 million should be earmarked from the underspending at this stage.

12. The total of the provisional sums identified above is £8.5 million. To the extent that these are not required following the review of the 2003/04 budget they could be used to enhance the earmarked reserves identified in paragraph 8 above. It would also be possible to build some flexibility into the budget process by establishing a contingency which would allow urgent initiatives, following a proper appraisal, to commence ahead of final budget approval. The rules for any such contingency would have to be clearly set out.

Summary of proposals

13. The proposals identified in the preceding paragraphs can be summarised as follows.

14. This compares with the anticipated availability of £25.5 million and would have to be adjusted marginally to fit.

C. Equality and diversity implications

There are none specific to this report.

D. Financial implications

The financial implications are those set out in this paper.

E. Background papers

• Previous 2002/03 monitoring reports to Finance Committee

F. Contact details

Report author: Sharon Burd, Director of Finance, MPS.

For more information contact:

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

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