Medium Term Financial Plan 2004/05 to 2007/08 – interim report

Report: 09
Date: 10 July 2003
By: Commissioner and Treasurer

Summary

This report sets out the proposed process and timetable for updating the Medium Term Financial Plan, gives an early indication of the expected impact of corporate pressures and updates the projected levels of grant funding. It also sets these interim projections in the context of the Mayor’s budget guidance for 2004/05, in particular the requirement to exemplify three savings options.

A. Recommendations

1. To note the process by which the Medium Term Financial Plan for 2004/05 to 2007/08 will be updated and the timetable of reports to this Committee.
2. To note the update of corporate items with a Service-wide impact.
3. To note the updated grant funding projections.
4. To note the savings targets arising from each of the options required to be exemplified under the Mayor’s budget guidance.

B. Supporting information

Medium Term Financial Plan (MTFP)

1. A report setting out the key elements of the Mayor’s budget guidance for 2004/05 was presented to this Committee on 9 June 2003. The timetable included in that report indicated that the following milestones would be key in developing and approving the medium term spending and funding projections to be included in the MPA’s budget submission to the Mayor:

1. a report to the July meeting of the Finance Committee giving early indications of the scale of corporate pressures facing the Service and of the likely levels of central Government funding in the period 2004/05 to 2007/08 (this report);
2. a further progress report to the September Finance Committee meeting, updating the pressures included in last year’s MTFP and outlining any new items flagged up by business groups;
3. a report to Finance Committee in October 2003 showing the final draft 2004/05 budget and medium term plan reflecting the costs produced in connection with the Step Change programme of officer growth (for approval by full MPA on 30 October in order to meet the GLA submission deadline of 10 November).

2. In order to meet the timetable implied by these deadlines, the MTFP is being updated by means of a two-stage process.

• A corporate update of service-level expenditure issues (e.g. pensions, police reform, inflation), together with latest information around grant funding projections. The results of this exercise are shown in this report.
• A review by business groups to update issues identified last year and to flag up any new items that have emerged since then. This process has commenced and progress will be reported to the September meeting of this Committee. In order to ensure a focus on the most significant items MPS Management Board has decided to set a de minimis limit of £1m on this review.

3. Information collected from business groups will be subject to internal senior management scrutiny before submission to members in September for inclusion in the MTFP. It is also intended to convene a savings working group to identify ways in which savings targets could be achieved. The Director of Finance is co-ordinating this work on behalf of Management Board.

Step Change programme

4. The MPS Step Change programme aims to deliver the joint MPS, MPA and Mayor’s vision of growth in MPS officers to 35,000. Implementation is being looked at over three to five years in accordance with the Mayor’s budget guidance. Further guidance may follow from the continuing dialogue with the Mayor on this subject. Growth is planned for both police officer and PCSO numbers, as well as civil staff. A The major part of the this growth is to deliver the Commissioner’s vision of dedicated, locality-based community officers, but there will probably need to be increases in police numbers across theelsewhere in the MPS.

5. The Step Change programme recognises that piecemeal the growth in officers and civil staff in recent years has largely been at a marginal cost i.e. direct staffing costs, plus allowance for increased office costs etc. on a ‘per head’ basis. Therefore, a key objective of the programme is to identify and plan for the necessary step change in the infrastructure of the MPS (e.g. accommodation, IS/IT, communications, transport, support functions etc.) that growth of this scale will require.

6. Costs identified as part of the Step Change programme will be a major element of the updated MTFP but they will not be available until the end of September. It is therefore planned to include them in the report to be considered by Finance Committee on 13 October 2003.

Corporate review of service-wide issues

7. A summary of issues with a service-wide impact is attached at Appendix 1. These are largely the same items included in the last MTFP, updated as appropriate. Members will wish to be aware of the following points.

(i) Free rail travel for police officers

The re-negotiation of the contract with the Association of Train Operating Companies (ATOC) has resulted in a significant increase in costs compared with the original agreement. There will be a knock-on effect on the tax liability payment to the Inland Revenue. Details of the new agreement were provided as an exempt item to the Full Authority meeting on 29 May 2003. Costs in 2004/05 and 2005/06 will be subject to survey but will be not less that an agreed minimum and will be capped at agreed maximum levels. For illustrative purposes the figures shown in Appendix 1 represent the mid-point of the range of possible costs.

For 2006/07 and 2007/08 no cap has been negotiated and although the costs in those years shown in Appendix 1 have only been increased by inflation the potential exists for the survey results to prompt a further significant increase in costs. On current assessments if the MPA had to pay at the maximum level in 2004/05 this would add £3.4 million to the estimated costs.

(ii) Police pensions

The figures shown in Appendix 1 reflect the projections produced for the Authority by Hymans Robertson. Details were provided to this Committee at its meeting on 9 June 2003.

Funding projections

8. A summary of projected levels of grant funding over the medium term is at Appendix 2. Making realistic projections has been particularly problematical due to the lack of any information from the Home Office about funding levels in 2004/05 and 2005/06 following publication of SR2002.

9. The only information in the public domain about funding levels in those years was the statement in the National Policing Plan that “funding in 2004/05 and 2005/06 will grow in cash terms by at least 4% a year”. However, this figure relates to total police resources and experience in recent years has shown that headline increases on this basis can translate into significantly lower percentage increases in the amount of grant distributed to police authorities by way of the allocation formula. This results from disproportionate increases in top sliced provisions and earmarked grants. There is no clarity about the relative movement of these various components next year or the subsequent two years.

10. There was a major review of the grant distribution methodology in 2002 resulting in formula changes in 2003/04. There will be no methodology changes for 2004/05. However there are likely to be changes in the data used in the formula. These will arise from at least three sources.

• Some data, eg population, is regularly updated on an annual basis. This would be expected to have a marginal impact in a normal year.
• The Government is due to feed in 2001 Census data for the first time in 2004/05. Because this reflects changes that have taken place over ten years since the previous Census the impact is likely to be quite volatile.
• The Home Office is currently collecting information from all police authorities on their civil staff pension costs. This will be used to recalculate the Metropolitan Police civil staff pensions uplift in the allocation formula. The uplift is intended to reflect the fact that MPA civil staff pension arrangements differ from those of all other authorities. The calculation will be impacted for the first time by the transfer of the MPA civil staff pensions arrangements into the principal civil service scheme during 2002/03. However there may also be significant movement in other authorities’ pension costs following fund revaluations.

11. We will have to monitor carefully the impact of these data changes as information emerges. However it is expected that changes in formula grant entitlement will be subject to limitation by way of a system of floors and ceilings as in 2003/04. The impact in 2003/04 was to limit the MPA’s formula-based grant increase to 5.2%, although unfettered application of the formula would have generated an increase of 6.8%. The difference represents effectively a ‘deferred’ grant entitlement of approximately £27 million. Given the scale of this surplus above the 2003/04 ceiling it is unlikely that the formula effect of data changes in 2004/05 could bring the MPA’s entitlement below the ceiling in that year. Therefore the crucial assumption that has to be made in order to assess the Authority’s formula-based grant for 2004/05 is the level of the ceiling.

12. On the basis of recent history a headline increase of 4% in total police resources may result in an increase of no more than 2.5% in grant distributed by the formula. The Government is likely to set a the floor broadly in line with some measure of inflation. It would be expected that there would be some There would have to be a reasonable gap between the floor and the ceiling. However it is felt unlikely that the ceiling would exceed 3.5% 4%. A ceiling at this level would represent a similar relationship to the headline increase in 2004/05 as the MPA’s ceiling bore to the headline increase in 2003/04. However it must be stressed that within a tight overall settlement a 3.5% ceiling might be seen as a relatively optimistic assumption. Indeed given the fact that total police resources are only set to increase by 4% this might be seen as optimistic. This assumption has been We have used to estimate a 3.5% ceiling assumption to estimate the formula grant entitlement for each year in the medium term projections. A 0.5% variation from this assumption would change grant entitlement, and therefore the required precept or savings, by £7.8 million.

13. Earmarked grants have been assessed on the best information currently available. Specific issues are as follows

• Grant towards the cost of free travel – HO have indicated that at this stage they are only able to identify a further £1m (to be shared between the MPA and the City of London Police) although further funding may be available from 2005/06 onwards depending on the outcome of SR2004.
• Matched funding for PCSOs – further grant may be available in future years but this will need to be matched by funding to be identified by the Authority. The cost implications will be flagged up as part of the assessment of the Step Change Programme.

Budget guidance

14. The Mayor’s budget guidance requires the Authority to exemplify savings requirements precept impacts across the following range of options:

• Option 1 - a precept increase limited to 2.5% 2003/04 precept plus inflation at 2.5% (£454.8m)
• Option 2 - 2003/04 precept plus full-year cost of 2003/04 officer and PCSO growth
• Option 3 - a budget requirement (net budget less all specific grants) of £2,351.6m per the 2004/05 forward plan in the published final GLA budget. precept in 2004/05 to support a budget requirement (which is the net budget less all specific grants) of £2,351.6m.

15. Table 1 summarises the provisional budget requirement for 2004/05 using the latest assessment of corporate issues (Appendix 1) and other committed costs as reflected in the forward plan included with the 2003/04 budget submission to the GLA (many of which are presently being updated by business groups as part of the two-stage process outlined in paragraphs 1–3 above).

Table 1: Summary of provisional 2004/05 budget requirement

16. The provisional 2004/05 budget of £2,583.3m shown in Table 1 compares with an equivalent figure of £2,549.2m included as the medium term forecast for 2004/05 in the 2003/04 budget submission to the GLA. This increase arises mainly as a result of the inclusion of the higher cost of free rail travel, the greater proportion of PCSO costs falling to the Authority in the light of the lower than expected grant allocation from the Home Office, and the impact of the first part of the MTFP review across the whole range of corporate items.

17. Table 2 uses the provisional budget requirement in Table 1 and the updated funding projections in Appendix 2 to show the potential precept increases and savings targets under Options 1 and 2 of the Mayor’s guidance.

Table 2: Potential precept increases and savings targets under Options 1 and 2 of the Mayor’s guidance

18. The impact of Option 3 of the Mayor’s guidance (which is based on a stipulated budget requirement rather than a precept increase) is shown in Table 3.

Table 3: Potential precept increase and savings target under Option 3 of the Mayor’s guidance

19. Members are reminded that the figures in Tables 1, 2 and 3 do not include any costs associated with the Step Change programme. This would further increase the projected precept.

Conclusion

20. Savings of the magnitude shown for Options 1 and 2 would have serious implications. If pursued, such savings would call into question the wisdom of proceeding with this year’s growth in police officer, PCSO and civil staff numbers and would probably be impossible to achieve in purely non-staff related expenditure. Officer and PCSO growth over the previous two years would also probably be under threat.

21. Option 3 produces a savings requirement of £42.6 million. This assumes a precept increase of 18.7%, before any consideration of the Step Change programme costs, which is based on a grant projection which in some respects may be optimistic. shows a projected precept increase of 18.7% (as well as implied savings of £42.6m) but, of course, does not include any Step Change Programme costs.

22. Work will now be put in handAs described in paragraph 3 above, the MPS Management Board has already commissioned work to identify savings for inclusion in the 2004/05 budget. Members will be aware of the limitations on this exercise if the number of police officers and PCSOs is not to be reduced. Police pensions and contractual service payments also represent a significant proportion of the total budget. In effect the savings have to be found from headingsbudgets which represent no more than about 30% of the total budget.

23. Savings of over £100 million have already been made cumulatively over the first three MPA budgets. Given the uncertainties at this stage around grant and precept funding and the potential for further budget demands to be identified as the MTFP process moves forward it would be prudent tohas been agreed that the Director of Finance’s team work to ana initial savings target of £50 million. Progress will be reported to the Committee in September. This work will also include exemplifying the implications of budget reductions of the scale which would be needed under options 1 and 2 in the Mayor’s guidance.

C. Equality and diversity implications

There are no equalities and diversity implications arising from this report.

D. Financial implications

There are no specific financial implications not discussed in the body of the report.

E. Background papers

• GLA Group Budget Guidance Notes 2004-05

F. Contact details

Report author: Jill Hatch, Financial Planning Manager (Revenue)

For more information contact:

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

Appendix 1: Corporate pressures identified from MTFP process - Impact 2004/05 to 2007/08

Figures are shown as incremental increases.

Appendix 2: Projected grant funding 2003/04–2007/08

Notes

1. Assumes annual increase in formula-allocated funding at ceiling of 3.5%.
2. MPS special payment is assumed to increase at same rate as police grant.
3. Crime Fighting Fund provides full continuation funding for officers recruited 2000 to 2003 and 75% funding for officers recruited in 2003/04.
4. Assumes HO will fund London pay lead at 75% of annual cost excluding ERNIC.
5. Grant payments available up to 2003/04, subject to qualifying expenditure. Infomal information suggests grant may continue for a further two years.
6. This grant is paid as a contribution to costs associated with pre-1990 debt and will disappear over time.
7. HO grant towards cost of free rail travel expected to increase by £1m (80% of which will be paid to the MPA) in light of new contract with ATOC. Any further increase in grant towards the higher cost will depend on the outcome of SR2004.
8. Grant for Airwave service costs will be reflected when expenditure profile becomes clearer.
9. Grant to meet minimum cost of Special Priority Payments to police officers introduced under Police Reform.
10. Assumes counter-terrorism grant continues at 2003/04 level.
11. Grant for security PCSOs recruited in 2002/03 assumed to remain at 100%. Community PCSO funding reduces to 75% in 2004/05 and 50% in 2005/06 and thereafter.
12. Matched funding for 250 PCSOs to be recruited in 2003/04 was announced after the budget was set. Figures for 2004/05 assume full year costs for those staff but no further increases.

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