Provisional revenue outturn 2003/04

Report: 06
Date: 24 May 2004
By: Treasurer

Summary

This report provides the latest information on the provisional revenue outturn position for the financial year 2003/04 and proposes transfers to various reserves. It also seeks approval to re-profile savings required for Police overtime under the PNB agreement given the failure to achieve the reductions needed in 2003/04

A. Recommendation

The Committee is asked to:

1. Note the provisional £5.6m overspend at outturn (which is after transferring the managed underspend of £18.9m to reserves and before considering use of the net underspend on pensions)
2. Note that a review of the outturn will be reported to the Finance Committee in July.
3. Approve the use of the net pensions underspending to a) maintain the 1% general reserve, b) provide for prudent earmarked reserves, c) set aside a provisional sum to support in 2004/05 the cost of police officers’ free rail travel, and d) increase the budget pressures contingency reserve, with the balance transferred to the pensions smoothing reserve.
4. Approve the proposal to seek HMIC’s agreement to re-profile the savings in police overtime required under the PNB agreement (para 6).

B. Supporting information

Overview

1. The revenue outturn position for 2003/04 reported to members in April indicated a forecast underspend at year end of £2.8m, after transferring £18.9m to reserves approved by the MPA and as required under the budget approval for 2004/05, and assuming the transfer of the net underspend on pensions to the pensions reserve in accordance with MPA policy.

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 meet earlier statutory timescales i.e. it is intended to provide the Audit Panel meeting on 19 July (and Full Authority on 29 July) with the draft Statement of Accounts for the year, some 2 months earlier than last year. At the time of compiling this report some final accounting adjustments remain to be made but there are no issues yet identified that would indicate a threat to the underlying position reported in this report. It is proposed that the final outturn will be submitted to the July Finance Committee. In the meantime the Committee’s agreement is sought to final adjustments and transfers to reserves so that these can be reflected in the draft accounts.

Overall Position

3. The latest forecast outturn position for the year ended shows a provisional overspend of £5.6m compared to the forecast £2.8m under spend reported to members in April. Members are reminded that this allows for the transfer to reserves of the £18.9m referred to in paragraph 1 and that the forecast already included an accrual of £3.2m of back pay for police inspectors as previously reported verbally to members.

4. It is too early to give Members a full explanation of the variances from the last forecast to outturn but this will be provided to members following a detailed outturn review exercise. At this stage however a number of significant movements have been identified- which are in overtime, running expenses and income.

Overtime (Police Officer and Police Staff)

5. One reason for the change to the forecast is the increase in expenditure on overtime to support Operation Crevice and wider counter terrorism activity following the terrorist attacks on Madrid. As members will be aware Operation Crevice focused on issues surrounding counter terrorism, and in the light of events in Madrid and the heightened security position there was little scope to keep within the forecast and the outturn is £7m above forecast. More detail will be presented to Members following the detailed outturn review exercise.

6. In April the HMIC invited the MPS along with all other forces to renegotiate the level and profile of overtime savings required under the PNB agreement. In view of the difficulty of meeting the required savings in 2003/04 MPS officers have been in discussion with the HMIC over this and it is proposed, subject to Member agreement, to re-profile the savings target over an extended period. Table 1 shows the existing and revised profile for savings, which are required to deliver the total target of £10.5m. Members are asked to formally approve this revised profile, which has already been submitted, in draft to HMIC for their consideration.

Table 1 - Re-profiling PNB savings target

NB – the £5m target for 2004/05 is made up of the £2.5m reduction in the 2003/04 budget, which rolls forward, and the £2.5m reduction made in the 2004/05 budget.

Running Expenses

7. Overall there has been a net increase in running expenses of £8.4m. The main areas of additional expenditure have been in premises, as a result of a final adjustment payment to Carillion, and in forensic service charges where a backlog of work has been cleared by FSS. The reasons for the change to the forecast (including other variations to the previous forecast) will be further investigated as part of the outturn review exercise.

Income

8. The final position on income has exceeded the forecast by £7m and has partly offset the increase in overtime and running expenses. Early investigation shows that there are no specific areas where the forecast was significantly understated but that the additional income is spread across on a number of income lines. Again, further analysis and explanations of variances to the previous forecast will be sought as part of the outturn review and reported to members.

Expenditure of a capital nature (Airwave-related adjustments)

9. At the close of each financial year it is necessary to transfer expenditure of a capital nature, which has been met from the revenue budget to the capital accounts. This produces an underspending in supplies and services which is then matched by revenue contributions to capital outlay (RCCO) thus leaving the bottom line of the revenue account unchanged. The expenditure identified for this purpose in 2003/04 amounts to £10.2 million. As reported to the Committee in April it is proposed to utilise this accounting adjustment to facilitate objectives involving Airwave capital grant.

10. Firstly the budget for 2004/05 assumed that Airwave grant totalling £3.9 million would be available to reduce the demand on the council tax. Of this sum £0.3 million has been received as revenue grant in 2003/04 and this will be put directly into reserves to be called on in 2004/05. The balance of £3.6 million will be paid as capital grant in 2004/05. An equivalent amount of RCCO in 2003/04 will be substituted by use of capital reserves, thus creating an underspending on revenue account, which can also be put into reserves for use in 2004/05. The capital reserves will be restored in 2004/05 by the Airwave capital grant.

11. Secondly a further £5 million of RCCO will be treated similarly in order to enable the Authority to swap that amount of revenue funding for capital grant in 2004/05 in order to assist PITO to finance specific Airwave developments.

12. The effect of these adjustments will therefore be as follows:

• Supplies and services will show an underspending of £10.2 million as the expenditure is transferred to capital
• This expenditure will be funded: £8.6 million from capital reserves, £1.6 million from RCCO with the latter showing as expenditure in the revenue account
• Additional grant income of £0.3 million will be reflected in the revenue account
• A total of £8.9 million will be transferred to an earmarked Airwave-related reserve, leaving the bottom line of the revenue account unchanged.

Pensions expenditure

13. During the year the budget monitoring has been forecasting the position on net police pensions expenditure as neutral as it is the policy of the Authority to use pensions underspending to support pensions reserves. The final net position on police pensions for 2003/04 is an underspending of £27.7 million. This comprises an underspending on pension expenditure, additional income from transfer values and also from police officer contributions. The reasons for this result will be investigated further as part of the outturn review, although we know that the number of police officers retiring was less than expected. There is a possibility that officers have deferred planned retirements because of pay increases related to PNB agreements, in which case there could be an unexpected increase in retirements in the current year. There has also been a reduction of over 60% in the number of medical retirements during 2003/04, which will have reduced pension lump sum and ongoing payments. This reduction is a considerable achievement and in addition to the budgetary implications, this can be reflected in the efficiency plan

14. The policy to build up pensions reserves to relieve pressure on future budgets was decided in the light of the findings of Hymans Robertson’s review of police pensions costs over the next ten years. Since then the Home Office has begun a process, which should lead to new financing arrangements for police pensions. These arrangements should improve the stability of pension costs as they impact on the Authority’s revenue budget. During the 2004/05 budget process it was agreed that this would probably obviate the need for putting further money into pensions reserves after 2003/04.

15. A number of risks and uncertainties remain in relation to pension costs over the short and longer term. First, although the new arrangements have general support, their introduction is not yet guaranteed. The timing of the change is uncertain. April 2006 is the target implementation date but it could slip. The projected bulge in officer retirements starts in 2005/06 and any slippage would mean that high pension costs would be a direct hit on the Authority’s budget for longer. It is not yet clear how the MPA will be affected by the transition to the new financing arrangements. Reserves may be needed to help cope with an adverse impact. Even under the new arrangements the Authority could find itself facing exceptional costs in relation to ill-health retirements where it is likely that police authorities will have to meet capitalised lump sum costs.

16. It would therefore be prudent to maintain the current policy in relation to pensions reserves subject to a review being carried out during 2004/05. The working group charged with drawing up an implementation plan for the new financing arrangements is due to report by October and this would represent an appropriate trigger for a review.

17. However in view of the size of the net underspending on pensions in 2003/04 and therefore the potential transfer to the earmarked reserve, it is appropriate to use a proportion of the underspending to address other demands and pressures. The first requirement is to offset the net overspending of £5.6 million on all other heads.

Reserves and Budget Pressures

18. In addition to those earmarked reserves already approved by Members as part of the budget strategy for 2004/05, and the adjustments relating to Airwave grant, it is proposed to a) maintain the 1% general reserve, b) to provide for minimum prudent earmarked reserves, c) to set aside provisional sums to meet the additional cost of free rail travel for police officers, and d) to increase the budget pressures contingency reserve Each of these items are explained in more detail below.

General reserve

19. 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 £24.047m. Net budgeted expenditure for 2004/05 is £2,567m. To maintain the 1% minimum therefore the general reserve should be increased by £1.6m to £25.7m. Any marginal changes to the provisional outturn, which come to light during the remainder of the closure programme, will be reflected in the general reserve.
Potential transfers to earmarked reserves

20. 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:

• IBO Reserves – A transfer to reserves of £2m is required to partly fund the Property Services cost of creating Integrated Borough Operations rooms. The decision to support this has already been approved by the MPA.
• Legal Costs Reserve – The closure of accounts has revealed a number of areas where there are legal disputes outstanding and where it would be prudent to provide funds for resolution of such cases. It is suggested that the sum of £1.0m is set aside for this purpose.
• MPA Reserves – Within the MPA budget 3 areas have been identified as needing either a carry forward or creation of a reserve. These are for Efficiency and Effectiveness work, consultation initiatives, and the ongoing costs of the Morris Inquiry. It is anticipated that a sum of £1.6m will be required.
• Devolved Budgets – As the overall bottom line shows an overspend of £5.6.m, (before managed underspend and pensions adjustments) the scheme of devolution arguably does not apply as such. However as part of the continuing rollout it might be considered appropriate to provide encouragement for those pathfinder sites in particular, who managed their budget to an 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. On this occasion it is proposed to request a reserve of £1.0m.

21. The total of these four proposed transfers to earmarked reserves is £5.6m.

Budget pressures

22. A number of budget pressures have emerged since the budget was submitted by the MPA in December 2003 and agreed by the Mayor and Assembly in February 2004, and these require funding to be identified in 2004/05. 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 2003/04 outturn in order to identify opportunities to fund pressures within the 2004/05 budget. In the meantime it is proposed to earmark funds for only the most significant of these budget pressures as follows:

• Police Officers Free Rail Travel - The arrangements for police officers free rail travel was renegotiated as reported to the MPA on 29 May 2003. On the basis of the latest figures the additional costs and associated tax implications would be around £8m in 2004/05. A contribution of £5m towards this amount could be provisionally reserved out of the 2003/04 outturn and as such reduce, but not eliminate, the impact on an already tight budget for 2004/05. The ongoing costs in future years will be considered within the Medium Term Financial Plan in due course.
• Other reserve requests/budget pressures – business groups have identified a number of other budget pressures and/or requests for earmarked reserves as part of the closing process. These include the growth item for TIBs implementation, implementation of NIM, and MPS Morris inquiry costs. At this stage, it is difficult to make final decisions on these requests until a clearer view of the outturn variances are available. It is thus proposed that a sum of £4m is added to the existing budget pressures contingency reserve and that the requests be reviewed during 2004/05 in light of the review of the final outturn and any other budget pressures, which emerge.

Police pensions reserves

23. As at 1 April 2003 the Authority’s balance sheet includes a pensions provision of £35.6m representing 75% of the liability to pay lump sum commutations to officers who have completed their pensionable service but not yet opted to retire. For technical accounting reasons this will in future be treated as a reserve. The balance sheet also already includes £4m for a pensions smoothing reserve to mitigate the expected rise in pension costs.

24. As a result of the proposals set out in the preceding paragraphs the balance of the pensions underspending available for transfer to the pensions smoothing reserve is £5.9m, which will increase that reserve to £9.9m.

Summary of proposals

25. The position can be summarised as follows.

Table 2 - Summary of proposals

Conclusion

26. Although this report is presented as an overspend position, this is after identifying £18.9m of underspends to support next years budget, and dealing with other budget pressures which emerged during the year. This represents a dilemma in respect of the scheme of delegation since many budget holders have managed within the resources allocated to them. The improved position on the pensions account has enabled us to balance the books in a way which was not originally planned. The need for us to further develop our budget forecasting is recognised and this links with the report on the Financial Management Strategic Programme elsewhere on this agenda

C. Race and Equality impact

There are none specific to this report.

D. Financial implications

The financial implications are those set out in this paper.

E. Background papers

Previous 2003/04 monitoring reports to Finance Committee

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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