Revenue outturn 2002/03

Report: 08
Date: 10 July 2003
By: Treasurer and Commissioner

Summary

The revenue outturn for 2002/03 has now been finalised and the net underspending for the year confirmed as £25.618 million. This is closely in line with previous forecasts submitted. The outturn allows for strengthening of the balance sheet provisions to address issues on which the accounts have previously been qualified. Subject to confirmation by the District Auditor it is anticipated that the qualifications relating to these provisions can now be removed. Proposals are also included in this report for transfers to earmarked reserves to meet known items for which funding will be required in the foreseeable future.

A. Recommendations

The Committee is asked to confirm the transfers to general and earmarked reserves detailed in this report and summarised in paragraph 29.

B. Supporting information

Outturn position and budget variances

1. A report on the provisional revenue outturn for 2002/03 was submitted to the meeting of the Finance Committee on 9 June 2003 and Members were advised that a further report would be submitted to their next meeting. The posting of financial transactions to the accounts has now been concluded and this report updates Members with the final outturn.

2. Work is progressing on the detailed financial accounts including the various notes and supporting statements to the Revenue Account and balance sheet. These will be submitted to the Audit Panel for scrutiny before approval by the Authority in September.

3. The statement attached as Appendix 1 summarises the revenue outturn and shows a net underspending of £25.618 million (1% of budget) for the year. This is closely in line with previous forecasts and the provisional outturn submitted to the last meeting of the Finance Committee.

4. Within the overall totals, the major variances have been drawn to members’ attention in budget monitoring reports during the year. Underspendings have occurred in both police and civil staff pay primarily as a result of recruitment occurring later than provided for in the budget and the police pay award settled at a rate lower than anticipated.

5. Expenditure on police overtime increased significantly in the last few weeks of the year resulting in an overspending of £3.787 million. This reflects the increased demands at this time to respond to the public order issues arising from the war in Iraq and the increased threat of terrorism. Savings of £2.5 million have been incorporated into the 2003/04 budget to reflect the PNB agreement for reducing overtime. Additional funding is being sought in respect of the security issues but clearly there are very difficult pressures on this item. The budget will be closely monitored in 2003/04.

6. The actual cost of police pensions in 2002/03 was £12.167 million below the budget. This results from fewer officers retiring than forecast, including in particular a substantial reduction in medical retirements compared to the previous two years. This underspending has enabled a further strengthening of the provision for pension liabilities. This provision now reflects 75% of the lump sum entitlement of officers who have attained 30 years service as at 31 March 2003. Subject to confirmation, the external auditor has indicated that this should be sufficient for him to remove his qualification of the accounts on this issue.

7. The underlying position for pensions is, however, a substantial growth over the next few years as reported to the Committee at its last meeting. The 2003/04 budget is consistent with the forecasts contained within the Hymans Robertson report on pensions and any headroom available will be absorbed by the longer term pressure on pensions costs.

8. Business group running expenses show an overspending of £3.771 million. This variance is covered by favourable variances on other devolved expenditure and income budgets.

9. Service wide running expenses are £2.103 million less than the overall budget of £400.515 million. This total includes, however, the MPA contingency of £3.606 million that was unspent at the year end. Also, within the total, the compensation budget recorded actual payments of £16.908 million against a budget provision of £27.737 million.

10. Offsetting these savings, additional expenditure was incurred in accelerating the purchase of equipment and undertaking premises maintenance work funded either directly from receipts from partnership agreements or by applying savings in devolved expenditure and income budgets elsewhere. A major element of equipment purchases was for IT workstations that are currently due for renewal.

11. In budget monitoring reports during the year, the compensation budget has been forecast to be fully spent on the basis that any surplus would be transferred to the provision for third party liabilities at the year end. The outturn for the compensation budget together with savings in pensions costs has enabled a transfer to be made so that the estimated liabilities of £40 million as at 31 March 2003 are now fully funded. Subject to confirmation by the District Auditor, this should now allow the audit qualification of the accounts in respect of this item to be removed.

12. Business group income shows additional receipts in excess of budget amounting to £11.461 million. This includes increased charges negotiated with the Palace of Westminster and British Airports Authority, income from the London Safety Camera Partnership that was not included in the budget and charges made to other agencies for operational support provided during the year. Most of this income is reflected in the budget for 2003/04 although this will continue to be monitored throughout the year and as part of the budget development for 2004/05.

13. Service wide income also shows a significant surplus of £15.411 million. This includes additional income of £4million for transfer values received from external pension schemes in respect of police officers joining from outside the police service. In addition, charges made to external bodies for police officer services include a sum for notional pension costs. This income has been excluded from budget monitoring reports on the basis that it would be applied to meet the requirement to build up the provision for pension liabilities.

14. The additional income from transfer values is difficult to forecast and has been significantly higher than previous years. This reflects the substantial growth in police numbers including mature officers joining from other occupations. With the ongoing level of recruitment to build up police officer numbers, it is likely that there is some scope to anticipate further income in this heading. Other pension receipts are now reflected fully in the 2003/04 budget.

15. Interest on investments exceeded the 2002/03 budget by £3.8 million. This reflects increased cash balances available for investment arising from the strengthening of reserves and provisions together with favourable movements on cashflow for capital expenditure and grants. The budget for 2003/04 has been increased by £0.65 million but there should be further scope to anticipate more receipts in this financial year.

16. In addition income has been obtained for a wide range of items that were not fully reflected in the budget. These include courses (£500,000), the fire strike (£400,000), detained persons (£200,000) and a number of other items all less than £500,000. These receipts exceeded the budget for other income by £6.86 million. Many of these items reflect additional costs that are charged to other headings in the accounts. The budget for 2003/04 has also been increased by £3.68 million. Nevertheless there may be scope to anticipate further additional receipts and this will be kept under review in monitoring the 2003/04 budget forecasts.

17. The budget line for new funding shows a shortfall of £5.328 million. This arises from underspendings on grant funded activity where the income has been carried forward to be applied in 2003/04.

Earmarked reserves and provisions

18. Within the outturn statement, account has also been taken of amounts transferred to various reserves and provisions. The most significant items are the amounts transferred to the pension and third party liability provisions to address the inadequacy which has led to the qualification of the accounts.

19. Net transfers to other reserves and provisions are shown in the outturn statement at £7.833 million. This includes amounts which Members have previously approved to be reserved in the 2002/03 accounts in respect of:

Criminal Justice Reform – Glidewell

£1.853m

Charlton Car Pound

£1.300m

Backlog maintenance

£1.000m

Child Protection

£0.450m

Total

£4.603m

20. In addition, arrangements have been made to provide police officers and relevant civil staff with appropriate protective clothing in the light of developments that have occurred during the year. Orders have been placed and expenditure committed against the 2002/03 budget. However, it was not possible to obtain delivery before the year end and this cost is not reflected in the total for Supplies and Services. In order to fund these purchases when deliveries are received, an earmarked reserve has been established in the accounts. This item, together with a number of other minor adjustments to existing reserves, accounts for the balance of £3.230 million included in the statement for transfers to other reserves and provisions.

21. The report to Finance Committee on 9 June 2003 flagged up proposals to earmark further reserves for specific expenditure requirements and to increase the general reserve to maintain its balance at 1% of net budgeted expenditure. The amounts proposed were as follows:

Increase in general reserve

£1.8 million

Police pensions reserve

£4.0 million

Capital reserve

£4.0 million

Estates/accommodation

£4.0 million

Resources systems

£1.0 million

Devolved budgets carry forward

£3.0 million

Total

£17.8 million

22. It is recommended that the above transfers to earmarked reserves be confirmed subject to funding for the Resources systems being increased to £1.25 million to ensure adequate resources for the ongoing implementation of MetHR and the replacement of MetFin. In addition it is proposed that funds be reserved to meet the costs of improving physical security in central London accommodation. The costs estimated for these works amount to £1.5 million. These additions increase the recommended transfers to general and earmarked reserves to £19.6 million.

Other budget pressures

23. Further pressures on the 2003/04 budget were identified in the provisional outturn report. These included:

• Accelerated police officer recruitment
• Police officers free travel
• PCSOs matched funding by Home Office

The report flagged up that consideration would be given to the extent to which these pressures could be contained within the 2003/04 budget.

24. The costs of accelerated police recruitment are very much dependant on the actual rate of new officers being recruited and the rate of officers leaving. Minor variations in the average costs of a police officer can also have a significant effect on this budget. This budget should therefore be closely monitored as part of the ongoing monitoring and review processes but additional funding would not be appropriate at present.

25. The increase in the cost of police officer free travel will clearly be significant. The additional costs reported in the previous report were £5 million. The tax implications are still being reviewed and are not yet clear. Nevertheless, the estimate of £5 million would appear to be the minimum likely impact and specific budgetary provision will need to made at some stage.

26. The shortfall in Home Office funding for PCSOs amounts to £0.6 million. Some flexibility arises in this budget from carry forward of grant that was not fully spent in 2002/03. The cost to the MPS will also depend on the rate of take-up of PCSOs funded by other Authorities. The overall position will need to be monitored to clarify the budget shortfall.

27. The high level outturn review undertaken as part of the closure of the 2002/03 accounts has identified that there is scope within the compensation budget and some income budgets, including transfer values receivable, to absorb budget pressures in 2003/04. Throughout the year it is highly likely that specific issues will arise requiring funding within the current budget. These should be met where possible by virement from other budgets. The overall position will continue to be set out in budget monitoring reports submitted to this Committee.

28. The balance of resources unapplied from the 2002/03 outturn after funding the earmarked reserves identified in paragraphs 21 and 22 above and maintaining the general reserve amounts to £6.0 million. In view of the uncertainty in the cost of the budget pressures identified above, it is recommended that this balance be transferred to an earmarked contingency reserve to meet unavoidable budget pressures. Transfers from this reserve will be subject to specific reports and approval of the Finance Committee.

29. The final recommendations on reserve transfers can be summarised as follows:

C. Equality and diversity implications

There are none specific to this report.

D. Financial implications

The financial implications are set out in this report.

E. Background papers

None

F. Contact details

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

For more information contact:

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

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