2004/05 draft revenue budget

Report: 06
Date: 23 October 2003
By: the Treasurer and Commissioner

Summary

The report updates the Committee on progress in seeking further budget reductions of up to £40 million beyond those already reflected in the draft budget submission. The target has not been achieved in full. Members are asked to support the inclusion of the reductions which have been identified in the submission to the Mayor.

A. Recommendation

1. To agree to recommend to the Authority the incorporation in the 2004/05 budget submission of the further proposed reductions summarised in Appendix 2.
2. To agree any further views the Committee would wish to make known to the Authority in approving the budget submission.

B. Supporting information

Introduction

1. At its meeting on 13 October 2003 the Finance Committee considered the draft 2004/05 revenue budget submission. The Mayor had requested that we seek further budget savings and reductions and we reported that we had set a target of £40 million for this purpose. This was on top of £50 million savings already reflected in the draft submission. This report provides an update on the identification of further reductions.

Inflation provisions

2. The budget provision for annual pay awards due in 2004/05 had been included at 3.5%. However in three of the last four years the police pay award has actually been 3%. It is therefore proposed that the provision for the 2004 award (and therefore for future plan years) should be reduced to 3%. This would apply to all pay groups. The reduction in the 2004/05 budget will be £4.9 million.

3. The draft submission includes a provision for non-pay inflation at 2.5%. This is in line with the Government’s economic target which is actually being slightly exceeded at the moment. The non pay inflation provision in the current year’s budget has been used to offset other budget pressures both in-year and on an ongoing basis. Non pay budgets have thereby already suffered a real terms cut.

4. There are particular risks next year around possible increased contract costs in relation to the re-tendering of outsourced contracts and the contract for free rail travel. It is therefore suggested that the non pay inflation provision be maintained at its current level on the understanding that it will have to meet all increased contract costs not otherwise budgeted for as separate items. On this basis the separate growth item for 2004/05 in the draft submission for potential increased outsourced contract costs (£2.4 million) will be deleted.

Expenditure of a capital nature

5. It is apparent that a certain amount of expenditure of a capital nature is currently being met from revenue. Some of this expenditure is one off and some is financed by specific grants or partnership funding. It would not be appropriate to make a budget adjustment for such items. However within the Department of Information revenue programme is a regular IT renewals programme of about £5 million. This expenditure conforms to the standard accounting definition of capital expenditure and should therefore be treated as part of the capital programme for 2004/05 and future years.

6. A sum of £5 million will therefore be transferred from the draft revenue budget to the capital programme. It is then assumed that the financing of the total capital programme will be adjusted by an equivalent increase in annual borrowing. This will have to be considered in the new prudential framework for capital finance which we hope to bring to the Committee at its November meeting. It is not anticipated that there will be any difficulty in approving the additional borrowing, the revenue cost of which will be approx. £0.5 million per year.

Pensions provision/reserve

7. Appendix 1 sets out a detailed review of the police pension provision and the pension reserve included in the Authority’s balance sheet at 31 March 2003. Two significant changes impact on our current policy:

• The effect of FRS17 in eliminating the requirement for a specific provision for lump sums payable to serving officers who have achieved full pensionable service.
• The likelihood that the financing arrangements for police pensions will change in the foreseeable future.

8. The review in the Appendix concludes that, subject to regular review, there is no need to set further sums aside for pension costs and that therefore the remaining flexibility in the pension budget provision can be released. This will enable the budget to be reduced by £5 million.

Other reserves

9. A review of all balance sheet reserves has been carried out. The general reserve is at its minimum policy level and should not be reduced. The remaining reserves are earmarked for specific purposes. Some amounts are already spent or committed. In most other cases they are still required for their original purpose and there would be an adverse impact on the budget if the reserve was not there. Sums totalling £2.5 million have been identified which will no longer be needed for the purpose for which they were set aside. It is proposed to use this amount to fund growth items in 2004/05 for backlog maintenance and the process for re-letting outsourced contracts (part) already included in the draft budget submission.

10. An additional one off budget pressure has now been identified in respect of 2004/05. The timing and number of public holidays will require additional costs of £5 million. It is essential that the contingency reserve for unavoidable budget pressures (£6 million) is preserved to fund this cost.

Business budget reductions

11. The multi-disciplinary team lead by DAC Richard Bryan, which carried out the original savings review to identify the first £50 million, has been reconvened to consider opportunities for further savings from business groups. Although savings were sought from all business groups, the exercise has been particularly difficult (not least given the short timescale) and opportunities for savings on top of those previously identified are limited and of a smaller cash value than those previously identified. The resulting proposals are included in the schedule attached at Appendix 2 and total £7.4m. Further work on identifying a small number of extra savings is continuing.

12. The additional savings have been split into three categories of low, medium and high risk to reflect both their achievability and impact on the service. Those listed as low risk are regarded as fully achievable but do result in reduced base budgets and a number are one off in nature for 2004/05. Those listed as medium risk are more difficult to achieve or require changes which might impact further on service delivery. The saving in relation to charges for laundry and cleaning to new recruits at Hendon is regarded as high risk due to its sensitivity and possible impact.

Due to the late nature of identifying these additional savings, no consultation has yet taken place on these proposals with the Trade Unions or the Police Staff Association. This paper will only be available to both when it is published by the MPA.

13. A number of other potential savings items have not been included. Relevant considerations are set out in the following paragraphs.

Police overtime

14. As part of the 2002 PNB agreement on pay reforms the Authority should be working towards a 15% reduction in police overtime over three years. A first instalment reduction of £2.5 million was reflected in the 2003/04 budget with an intention of making further savings of £3.5 million in 2004/05 and £4.5 million in 2005/06. The MPS Management Board has concluded that the savings scheduled for 2004/05 cannot be achieved as this budget is currently forecasting an overspend in 2003/04 reflecting increased operational requirements e.g. in relation to public order events, foreign dignitary visits, counter terrorism activity etc, which are unlikely to reduce significantly in the near future.

Step Change programme

15. A further review of the estimated costs of commencing implementation of the Step Change programme in 2004/05 is under way. This may identify scope for re-profiling the current estimates without compromising the objectives of the programme. Any such changes emerging after the Authority has approved the budget submission will be reported to members before forwarding to the Mayor.

Charges to recruits for accommodation at Hendon

16. The proposed savings do include a charge for laundry and cleaning. A charge for accommodation was considered and rejected as part of last year’s budget process. Circumstances have not changed and the reasons for rejection last year remain valid.

17. It is the view of the MPS Management Board that, beyond the level of savings now proposed any further reductions would impact adversely on operational effectiveness. They would require the elimination of complete operational units or a reduction in police officer and/or police staff posts.

Summary

18. The further budget reductions now proposed total £26.7m and are summarised in the table at Appendix 2.

19. The effect of the changes set out in Appendix 2 on the draft budget submission is reflected in the following table.

20. The increase in the police precept over 2003/04 as reflected in the draft submission is 18.7%. This reduces to 12.7% after including the proposed changes.

21. The cost of implementing the Step Change programme would be additional to these figures. The estimated cost in 2004/05 of option B in the Step Change business case is £31.9 million. This would increase the total budget to £2,566.9 million and, in the absence of any specific government funding next year, the precept to £531.8 million. The increase in the precept including Step Change would be 19.9%.

22. The direct response to the Mayor in relation to the savings options set out in the budget guidance is as follows:

• Option 3. If grant and precept funding were limited as determined in this option, the savings requirement would be as set out in the original draft budget submission. The net effect of committed changes and limited new growth is a savings requirement totalling £45.5 million.
• Option 2. If the precept is limited to £481.9 million as required under this option all the reductions proposed in this report would be needed in addition to those under option 3. There would still be a gap of £18 million which could not be bridged without reductions in police officer numbers and support staff and consequential adverse impacts on operational effectiveness.
• Option 1. This option would set a precept of no more than £454.8 million. Savings of £27.1 million would be required in addition to those under option 2. The whole of these further savings would impact on operational effectiveness.

23. The process of identifying savings must be continuous. In particular the current year’s spending must be kept under careful review both generally, to ensure that the managed underspendings can be generated to support the 2004/05 budget as proposed, and specifically in relation to key headings such as police overtime. As stated above (paragraph 15) work is ongoing to review the estimated Step Change costs and there may be revisions to reflect in the final figures.

C. Equality and diversity implications

The diversity implications of the budget are set out in the Equalities and Budget section of the budget submission. There are no specific implications of the proposals included in this report.

D. Financial implications

The proposals in this report will reduce the draft budget and precept for 2004/05.

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

Appendix 1

Review of Police Pension Reserve/Provision

The MPA balance sheet as at 31 March 2003 includes two sums set aside in respect of police pension liabilities.

• A provision for lump sums payable on retirement to officers who at the end of the financial year have completed 30 years service or are aged 55 years or above. This provision stands at £35.6 million which represents 75% of the estimated liability of £47 million. This level of provision has been necessary to satisfy the external auditor that the provision is adequate and the accounts do not need to be qualified.
• A reserve of £4 million to mitigate the lump sum costs arising from an increased number of officers retiring over the next ten years. The review by Hymans Robertson identified a potential requirement for a reserve of up to £50 million to meet the exceptional costs over the next ten years. The intention has been to build up this reserve and, on the strength of current budget monitoring, an underspending of around £7 million would be available to transfer into the reserve at the end of 2003/04.

The external auditor has recently advised that, when FRS17 is fully reflected on the Authority’s balance sheet as at 31 March 2004, it will not be appropriate to have any other provisions relating to pensions. This is on the basis that FRS17 will reflect the full accrued pension liability. Therefore the current provision will have to be reclassified as a reserve. At that stage the external auditor’s interest will diminish and in particular the adequacy or not of this reserve will no longer be a matter upon which he would qualify the accounts.

This change presents us with an opportunity to create a single reserve to address the two issues currently dealt with by separate provision and reserve. We can also make our own judgement about the appropriate level of the reserve rather than complying with the external auditor’s requirement.

There is a further likely change that we need to consider in reviewing the size of the reserve. A proposal was developed two years ago by the Treasury and the Home Office to change the accounting and financing arrangements for police pensions. This would involve the establishment of a pensions account separate from the police fund which would meet pensions payments and into which would be paid both employees and employers contributions. The latter would be assessed on an actuarial basis in respect of current police officers. The annual deficit on the account would be met by government grant.

The Home Office has now established a working group to consider and make recommendations on the detailed practicalities of, and timetable for, the introduction of this reformed system. This would appear to indicate that there is now a commitment to proceed with this change and the main issue is timing.

The consequence of this change is that the Authority would no longer be liable for meeting pension payments directly, neither the ongoing payments nor the lump sum commutations. Our pension costs would be represented by employers contributions which would be much more predictable and stable. In those circumstances the need for any pension reserve becomes doubtful.

It would be imprudent to assume certainty in relation to the proposed new financing arrangements and the terms for introducing such a change have not been clarified. However it is appropriate to think of the current and predicted future pension liabilities as being time-limited.

The current liability in respect of officers who have completed full service is £47 million. The estimated additional liability in respect of the increase in the number of officers able to retire over the next three years is about £20 million. The total potential liability for which we should have regard is therefore about £65-70 million. The combined reserve at 31 March 2004 would represent some 70% of this liability. Given that the current liability can be significantly discounted, this level of cover is considered adequate.

This position should be reviewed on a regular basis. The next review would take place during 2004 in the light of the 2003/04 outturn.

No further sums need to be paid into the reserve beyond those already planned in the current year. The budget for 2004/05 can therefore be reconsidered to ensure that it is as accurate a reflection as possible of the actual pension costs which will have to be met on a regular basis.

The draft police pensions budget has been reviewed in the light of current spending levels and as a result the final budget will be reduced by £5 million.

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