Capital Programme 2003/04 – Outturn

Report: 07
Date: 22 Jul 2004
By: Commissioner

Summary

This paper provides an analysis of the final 2003/04 revenue outturn position. Final accounting adjustments have been made and subject to external audit the outturn position is not expected to change. The position is as reported to Members on 24 May.

A. Recommendation

That members note the final revenue outturn position and further work to be carried out in 2004/05

B. Supporting information

Background

1. At Finance Committee on the 24 May members were advised of the provisional outturn for 2003/04. In summary the provisional outturn showed a net overspend of £5.6m before taking into account the net underspend on police officer pensions of £27.7m.

2. At Finance Committee on 24 May Members approved the use of the net pensions underspend as shown in table 1 overleaf.

Table 1 – Use of net pensions underspend

3. Final accounting adjustments have been made and subject to external audit the outturn position should not change. The position as reported to members on 24 May remains unchanged.

4. A detailed outturn statement for the MPS as a whole is attached at appendix 1 and the position for each business group is attached at appendix 2.

Movements from the period 11 Forecast

5. As part of the outturn review process, work has taken place to understand why the final outturn position was at variance to the February forecast. This was in order to learn lessons about how the forecasting process can be improved and also identify any issues which need to be taken into consideration in the budget for current and future years.

6. The February forecast as reported to members showed a potential underspend after transfers to reserves of £2.8m. Although this is close to the position at outturn there were some significant movements between expenditure and income lines and these are summarised in table 2.

Table 2 – Main movements from the period 11 forecast to outturn

Notes to Table 2

7. Note 1 - Overtime
The overtime forecast increased due to additional operational pressure and particularly Operation Crevice and wider counter terrorism activity following the terrorist attacks on Madrid. It is also apparent that the forecast was understated indicating difficulties for local budget holders in either forecasting activity levels or constraining expenditure in the latter part of the year. Further work will be undertaken to ensure that the forecast for overtime is more realistic. This will form part of the actions of the MPS’s Overtime Steering Group chaired by the Director of Resources.

8. Note 2 – Running Expenses
The Running Expenses heading covers a range of expenditure types, the two main areas where outturn varied significantly from forecast were premises and forensic services, an explanation for each is given below.

9. 2a - Premises
The Facilities Management (FM) and Major Works contracts with Carillion were terminated at the end of 31 December 2003. The termination of the contract with Carillion prompted a major exercise by Carillion to carry out the final measurement of a large number of measured term contracts. The overall effect of Carillion having finalised jobs adversely affected the level of the 2003/04 year end accrual compared to the levels previously reported each month.

10. At the time of the termination of the Carillion Contract in December 2003, Interserve were asked to increase the scope of their service delivery in respect of FM works and Scott Wilson were asked to assume responsibility for Major Works activity, previously delivered by Carillion. Whilst Interserve and Scott Wilson were trying to determine the scope of their new responsibilities during January and February 2004, accruals during those months were understated, a position that was substantially rectified at the March 2004 year end.

11. Property Services are currently actively assessing the remaining outstanding liabilities in respect of the Carillion contract and together with Finance Services, working in partnership with both Interserve and Scott Wilson to ensure that robust management information is provided in respect of ongoing job progress and month end accruals.

12. 2b - Forensic Services
The outturn for total Forensic Services Charges was £3.3m higher than forecast. This is a difficult area to forecast accurately since the cost of forensic work can vary significantly as can the timing of when work is completed and billed for. In order to remedy this situation and to provide a sound basis for full devolution in 2004/05, a number of initiatives have been adopted. These include an exercise to clear a backlog of work and measures to estimate and accrue for the cost of ‘work in progress’. This should provide for a more stable base for future forecasting but caused transitional problems in 2003/04.

13. Note 3 - Income
The forecast for income was understated due to what appears to be a general level of over prudence by budget holders. Most of the income lines show an increase between outturn and forecast with no particular income lines standing out other than operational receipts, which moved by £2m between the forecast and outturn. Operational receipts is a general income code where income generated through local initiatives is posted. As such it is difficult to validate the accuracy of the forecast. Given the apparent general level of over prudence Business Support will further reinforce the message to forecast more realistically for income.

14. Note 4 - Pensions
The net pensions underspend of £27.7m for 2003/04 is made up as follows:

15. Ordinary retirements were 511, some 28 less than expected. Based on an average lump sum of £75,000 and £17,000 annual pension, this saved approx. £2.1m in lump sums and £240k in monthly payments (half year impact). Total saving £2.3m.

16. Medical retirements were 59 and some 126 less than expected. Based on average lump sum of £ 50,000 and monthly pension of £11,000, this saved £6.3m in lump sums and £700k in pension payments (half year impact). Total saving £7.0m.

17. The process of approving medical retirements was changed during the autumn and all cases now need approval of both MPS and MPA. This accounts for much of the drop in numbers, but it is possible that a number of cases have also been delayed and will come through in 2004/05.

18. Contribution income was £6.3m more than budget of which approximately £1.0m can be accounted for by the over-strength position of 480 police officers at end of March 2004. Transfer Values income was £5.3m more than the budget of £2.7m which is likely to be a one off increase due to high recruitment levels.

19 The above analysis provides reasons for £15.6m of the net underspend. The remainder appears to be due to incorrect budgeting particularly for contributions income, this will be fed into the budget setting process for 2005/06.

Reasons for variances to budget

20. The MPS has recently completed an outturn review process whereby each Business Group has provided an explanation for outturn variance to budget. Issues identified in this outturn review will be taken into account for budget monitoring in 2004/05 and budget setting for 2005/06.

21. The following summarises the main issues for each of the Business Groups.

Territorial Policing

22. Overall Territorial Policing underspent by £13.2m. There were significant variances by budget line, both over and under spends, as detailed below:

Overspends

• £16.1m in Supplies & Services, caused by unbudgeted forensics spend (this is due to a shadow charging arrangement established in TP to build up an expenditure history upon which to base the allocation of the forensics budget which is now devolved; there is a corresponding underspend in Specialist Crime although as stated above there is an organisational overspend overall)
• £5.6m in Police Officer & Staff Overtime, due to operational needs including increased security measures
• £2.3m in Service Wide Transport, due to corporate vehicle hire relating to additional public order commitments
• £8.5m in Service Wide Income, unfavourable variance due to a reduction in income from TFL which is offset by reduced expenditure within the Transport OCU (see below TP underspends section).

Underspends

• £10.0m in Police Officer Pay, caused by a lower than planned average cost per officer and lower than expected Transport OCU activity
• £8.6m in Police Staff Pay, due to delays in recruitment resulting in slippage in TPHQ projects and a lower than expected Transport OCU activity
• £3.7m in Traffic Wardens Pay, caused by vacancies and a lower than expected Transport OCU activity
• £2.8m in PCSO Pay, due to the recruitment plan not taking account of leavers
• £14.1m in Business Group Running Expenses, due to a lower level of spend related to Traffic OCU, slippage in some TPHQ projects and management action to deliver an underspend across these devolved budgets
• £3.4m in Employee Related Expenses, due to a lower level of spend related to Traffic OCU, slippage in some TPHQ projects and management action to deliver an underspend across many devolved budgets
• £4.9m favourable variance in Business Group Income from immigration income, operational receipts and grants.

Specialist Operations

23. Overall Specialist Operations overspent by £15.1m. Variances by budget lines are:

Overspends

• £8.1m in Police Officer Overtime, due to a number of sections being understrength and increased terrorist threat and protection levels
• £4.2m in Transport Costs, due to overseas travel associated with counter terrorism activity
• £3.8m in Supplies & Services, due predominantly to IT procurement, body armour, CBRN equipment, ammunition and firearms expenditure related to counter terrorism activity
• £2.8m in Service Wide Supplies & services, mainly due to Operation Titan and officers on attachment from other forces
• £3.3m unfavourable variance in Service Wide Income, due to delayed recruitment resulting in lower costs and therefore income recovery.

Underspends

• £3.3m in Police Staff Pay, due to vacancies and ongoing difficulties with recruitment
• £5.9m favourable variance in Business Group Income due to additional funding to offset expenditure mostly for funded ACPO units.

Specialist Crime

24. Overall Specialist Crime overspent by £1.5m. Variances by budget lines are detailed below:

Overspends

• £4.5m in Police Officer Pay, due to changes to the deployment plan not reflected in changed budget allocations and unfunded posts
• £1.8m in Police Staff Pay, due to additional temporary staff, additional National Insurance Contributions on overtime and a level of recruitment above the number of staff budgeted for
• £3.6m in Police Officer & Staff Overtime, due to operational pressures such as gun crime
• £6.5m in Business Group Supplies and Services, mainly due to the clearance of a large backlog of forensic work and accruing for work in progress, both measures undertaken to improve the base position prior to devolution.

Underspends

• £14.8m in Service Wide Supplies & Services, due to the budget for forensic cost being held in SCD while costs were shown against OCUs (comment under Territorial Policing regarding shadow charging refers)
• £3.1m favourable variance on Business Group Income, due to operational receipts for Operation Reflex, Telephone Investigation Unit (TIU) and Regional Asset Recovery Teams (RART) Grant.

Deputy Commissioner’s Command

25. Overall Deputy Commissioners Command underspent by £1.3m. Variances by budget lines are detailed below:

Overspends

• £5.7m in Supplies & Services caused predominantly by additional network support costs and additional expenditure on updating IT equipment.

Underspends

• £1.9m in Police Officer Pay, due to difficulties in filling vacancies
• £1.7m in Police Staff Pay, due to a large number of vacancies and delays in security clearance
• £1.7m favourable variance on Service Wide Income, due to one off additional income including the Health & Safety Executive case costs, damages received and additional income from PITO.

Human Resources Directorate

26. Overall Human Resources Directorate underspent by £31.0m. Variances by budget lines are detailed below:

Overspends

• £1.4m in Police Officer Pay, mainly due to higher than expected numbers of recruits at the Hendon Training School
• £1.8m in Supplies & Services, due to HR Board initiatives, external consultants and increased numbers going through Hendon.

Underspends

• £16.3m in Pension Payments, as explained in the notes to table 2
• £4.9m in Employee Related Expenses, due to reduced cost of police officer recruitment advertising
• £12.9m favourable variance in Service Wide Income, mostly due to higher than expected Pensions Income as explained in the notes to table 2.

Resources Directorate

27. Overall Resources Directorate overspent by £7.3m. Variances by budget lines are detailed below:

Overspends

• £3.7m in Police Officer Pay, this represents the creation of a provision for Inspectors back pay which has been paid in 2004/05
• £3.5m in Employee Related Expenses, caused predominantly by the tax liability on free rail travel
• £7.2m in Service Wide Supplies & Services, mainly as a result of accounting adjustments to reflect revenue contributions to capital expenditure incurred across business groups
• £1.7m in Service Wide Premises Costs, caused mainly by transitional facilities management costs as outlined in paras 9-11.

Underspends

• £1.2m in Police Staff (Civil) Pay, caused by vacancies and ongoing recruitment difficulties
• £1.2m in Capital Financing Costs
• £6.5m favourable variance in Service Wide Income, due primarily to higher than expected Interest Receipt Income and Hendon Data Centre.

Metropolitan Police Authority managed budgets

28. There were no material variances within this budget group.

Centrally Held Budgets

29. The main variances to centrally held budgets were an underspend due to a lower award for police officer pay of 3% as opposed to the 3.5% budgeted, delays in the recruitment of Communications Officers (half the budget for this growth being held centrally) and reduced compensation expenditure as part of the managed underspend to be used to fund movements into reserves.

Actions to take forward following this outturn review

30. Actions following this outturn review fall into two main categories:

Improvements to forecasting processes and measures to strengthen budget discipline

31. Finance Services have recently introduced two new measures to improve budget monitoring and reporting. The department has undergone a reshaping, a central objective of which was to focus attention on this key area and secondly following the upgrade of the MPS’s financial system in February 2004 an advanced budgeting and forecasting tool is now available to budget holders. More detail on these initiatives is provided in the 2004/05 Revenue Monitoring report, which is elsewhere on this agenda.

32. These developments will improve the quality and accuracy of forecasting in general but specific attention will be paid to:

• police officer & staff overtime
• premises costs
• forensic services costs
• income

33. With regards to budget discipline, this issue was discussed as part of an informal briefing on the first revenue monitoring report at Commissioner’s SMT on Friday 16th July 2004. SMT reaffirmed the need to keep this area under review with specific actions underway on police overtime management, a review of year to date budget expenditure and training on devolved budget controls and processes.

Review of budget levels and allocations

34. This outturn review identifies a number of areas where budget allocations and expenditure levels, need to be scrutinised as part of the budget setting process for 2005/06, although Members are reminded that in many cases the 2004/05 budget has already been adjusted to reflect these issues as they were evident during 2003/04. Particular areas under review are:

• police officer pension costs and income
• police overtime
• police staff pay
• recruitment expenditure
• income

35. Members may also be aware that in addition to the outturn review, an external firm of consultants (Avail Consulting) have undertaken a review of budget allocations and budget setting processes. Their report is only at initial draft stage but early findings confirm the results of the outturn review outlined above. It is anticipated that the report will include potential improvements in the budget setting process to assist in the resolution of these problems.

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

Corporate Finance – 2003/04 Capital Budget Files

F. Contact details

Report author: Sharon Burd, Director of Finance Services

For more information contact:

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

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