Progress report on the medium term financial plan and budget submission 2006/07 – 2008/09

Report: 07
Date: 10 October 2005
By: the Treasurer and Commissioner

Summary

This report provides an update on progress to date in the preparation of the draft Budget Submission for 2006/07 to 2008/09 and Medium Term Financial Plan (MTFP), and the processes still being undertaken to establish a balanced budget prior to the formal submission to the Mayor.

A. Recommendation

That Members:

1. Members note the current financial overview position as set out in Appendix 1.
2. Note the prospects for government grant as set out in paras 5 – 7.
3. Confirm that reserves will not be applied at this stage to help close the budget gap.
4. Note that the draft MTFP and Budget Submission is to be submitted to the MPA Full Authority meeting on 27 October 2005.

B. Supporting information

Background

1. A progress report on the preparation of the draft MTFP and Budget Submission for 2006/07 – 2008/09 was submitted to the meeting on the Finance Committee on 15 September 2005. This report outlines the progress made since that meeting and the latest position on the budgetary proposals.

2. The financial overview at the time of the previous report was of a budget deficit of £26m in 2006/07 after allowing for a precept increase of 5.5% and an increase in general Government Grant of 4%. The detailed proposals were still subject to review by the MPS Management Board and consultation with the Trades Unions in line with the Partnership Agreement and the Police Staff Associations.

3. Further discussion has now been undertaken within Management Board and the overview position reviewed by the MPS Investment Board on 26 September 2005. An initial meeting was held with the staff representatives on 6 October.

4. The current budgetary overview is set out in Appendix 1.

Grant projection

5. The Government Grant projection contained in the last report was based on a 4% increase. The Treasurer at that stage advised that grant might be limited to a lower increase in the region of 3.2%. Indications from the Home Office continue to support this lower forecast.

6. It must be stressed that there is still significant volatility in the potential grant distribution with various factors still under review by the Home Office. These include: options for review of the grant formula; the revision of the police officers pension funding arrangements; changes in the distribution of specific grants; and the re-examination of Counter Terrorism funding arrangements.

7. However, in view of the overall indications currently available, the grant projection has been revised to 3.2% and this has reduced the grant income forecast by £15m.

8. It has also been announced that the grant settlement will cover a two year period and it is anticipated that the grant increase in 2007/08 will be at a similar level.

Current Budget expenditure pressures

9. As indicated in the previous report to Finance Committee, there are a number of spending pressures that are identified to maintain a standstill position of the level of service provision established in 2005/06. These can be categorised into the following broad areas.

1. Inflation: Including both the normal annual round of pay and price increases together with some exceptional increases such as energy prices.
2. Current programme commitments: This includes items such as the full year effect of Step Change Phase 2; Revenue effects of the capital programme; outsourced contracts transition costs; and increased costs of the C3i/Airwave programme as a result of delays arising from the NTL withdrawal.
3. Loss of funding sources/non-recurring savings: Items such as Central Operations (CO) tasking that was approved to be funded from reserves in 2005/06 but needs permanent budgetary provision; withdrawal of grant for the National Mobile Phone Crime Unit; one-off savings in Territorial Policing (TP) in 2005/06 to fund the Centralised Traffic Criminal Justice Unit (CJU); and a temporary Directorate of Information (DoI) contract saving to fund the implementation of the Resource Allocation Formula (RAF) formula.
4. Budgets currently overspending: The budget forecast for the current financial year includes a number of budgets that have faced significant pressures and are forecast to overspend. The largest areas of overspend are in forensic and DNA analysis where demand for support has substantially increased in recent years.
5. Nevertheless, the outturn forecast had remained within the approved budget because of a forecast underspend on pensions. In view of the costs of responding to the bombings and attempted bombings of 7 and 21 July (Operation Theseus) and the potential amount that may have to be covered by the MPA, efforts are now being made to balance the 2005/06 budget excluding the pensions underspend. Whilst this action may resolve the funding requirements in 2005/06, spending pressures will continue through into 2006/07 but the measures taken to contain costs may be short term or reflected in savings proposals elsewhere in the budget proposals. Account therefore needs to be taken of these issues in the MTFP and appropriate budgetary provision made.

10. The total amount required to maintain a standstill budget is £167m as summarised in Appendix 1.

Savings proposals

11. In order to offset spending pressures, savings proposals have been sought from all Business Groups and reviewed by the MPS Investment Board.

12. The overall level of savings identified is £77.549m. A summary by Business Group is given below:

Clearly, many of these proposals will be very difficult to implement and will have operational implications. The overall impact on officer and staff numbers would be an estimated redirection of over 800 police officers and about 500 police staff. This redirection will be absorbed by growth including the bid for Counter Terrorism funding (made to the Home Office) and the Safer Neighbourhoods proposals referred to later in this report. Nevertheless, significant workforce planning issues arise from this situation and these are also dealt with later in this report.

13. The savings proposals based on police officer and staff redirections are generally based on a full year saving. Even where it is possible to redirect officers and staff to the proposed growth areas, there may be a shortfall in the funding availability. The Safer Neighbourhoods proposal that would absorb 650 additional police officer posts, allows for funding 604 Police Constables and sergeants for six months and 46 inspectors for three months. Sufficient information is not yet available to consider the application of Counter Terrorism funding which is the subject of a separate bid to the Home Office (see para 17). This may also have part year funding arrangements although this is thought unlikely at this stage.

New initiatives/corporate priorities

14. The full MPA Authority meeting on 29 September 2005 approved the draft Corporate Strategy 2006 – 2009. This will be included in the Mayor’s Budget Submission as the MPS Business Plan and a separate report on this agenda deals with this item. The Corporate Strategy identifies the following seven strategic priorities.

• Counter Terrorism, Protection and Security
• Safer Neighbourhoods
• Organised Criminal Networks
• Capital City Policing
• Citizen Focus
• Together
• Information Quality

15. Given the financial constraints, it is recognised that there is little scope at present for redirecting significant resources towards the new corporate priorities. The Service Review has identified proposals that will release resources in the longer term, but these will not be available on the scale necessary in 2006/07. Indeed many proposals require initial investment to realise future savings.

16. Nevertheless, the resourcing of the corporate priorities has to be addressed as far as is possible. The report to the last Finance Committee meeting stated that a bid is being compiled to submit to the Home Office for additional Counter Terrorism grant. Discussions have taken place with the Home Office and the formal bid beginning with some £60m in 2006/07 and building to £200m including both revenue and capital requirements has been submitted.

17. The planned roll out of 368 Safer Neighbourhoods teams as reported at the last meeting addresses the second of the corporate priorities. The Business Case for this proposal is included as a separate item on this agenda.

18. Funding for this proposal is dependant on additional resources. Further discussion is being undertaken with the Home Office and the Mayor’s office to explore the possibility of securing of the necessary funds. The funding arrangements currently under discussion are as follows:

19. Whilst there is considerable support for the proposal and extra funding is being sought, there is, however, the possibility that the MPA might make a budget submission that exceeds the Mayor’s guidance to the extent of the part of the costs of roll out of Safer Neighbourhood teams.

20. Some new initiatives have also been included in the MTFP growth proposals to address corporate priorities and to start preparation for the Service Centres proposed by the Service Review. The following items have been included in 2006/07:

21. In addition, allowance of £3.76m has been made in 2007/08 for the implementation of the Initial Probationer Learning and Development Programme (IPLDP) as a result of Home Office requirements.

Current position and MPS actions

22. The overview position as set out in Appendix 1 shows a budget deficit on current grant and precept assumptions of £36m in 2006/07. This excludes the additional precept funding requirement for the Safer Neighbourhoods accelerated roll out of 368 teams in 2006/07. Further work is therefore necessary to consider options for reducing this deficit.

23. For 2005/06, budget monitoring is being tightened to ensure that the overall MPS budget is contained without taking account of the pensions underspend. This should realise £28m based on the latest forecast of the pensions underspend to contribute towards the costs of Operation Theseus. The Home Office has also recently confirmed interim grant of £10m towards these costs.

24. Some of the budget pressures in 2006/07 will be able to be met by targeting central budget provisions budget provisions available in 2005/06. These include the budget for non-pay inflation and some unallocated pay budgets. Further work is being undertaken to confirm the amount that can be funded from this source.

25. Management Board have also agreed a series of nineteen measures to bear down on costs. These include Business Groups taking further steps to maximise income streams; discussions with major suppliers to determine whether costs can be reduced within existing contracts; further review of current expenditure forecasts to identify areas of potential savings options; and review of the phasing of the C3i/MetCall programme.

26. The expenditure and savings proposals currently identified also continue to be scrutinised to reduce the funding requirement in 2006/07. Proposals arising from all of these approaches will be factored in later in the drafting of the MTFP for Full Authority approval on 27 October.

27. In the light of the overall financial position and the implications for staffing and recruitment, Management Board have considered police officer recruitment in 2005/06 and have agreed to aim at being 200 officers below the Budgeted Workforce Target (BWT) allowed for in the 2005/06 budget. This will assist in containing the budget in the current financial year and start to effect the implementation of savings required in 2006/07. Work is also ongoing to review the rank mix of officer posts included in the savings proposals to consider the options for redeployments.

28. For police staff, consideration is also being given to the recruitment activity in 2005/06 to avoid conflict with savings proposals and the potential opportunities for staff redeployments in 2006/07. Advice is being prepared by the Human Resources (HR) Directorate to give guidance to Business groups on the application of these principles.

MPA reserves

29. As part of the budget development, consideration needs to be given to the reserves available to the MPA. The issue impacting most significantly on these is the potential requirement to meet part of the costs of Operation Theseus.

30. The major reserves available for consideration are the balance remaining in the Police Pensions Reserve and the Budget Resilience Reserve. These currently amount to £22.5m and £22m respectively. These are in addition to the General Reserve of £28m.

31. The budget for 2005/06 did include £23m to be taken from the Pensions Reserve. This was the first step in a planned run down of that reserve in the light of the new pensions accounting arrangements that obviated most of need for such a reserve to be held. Part of the funding pressure for 2006/07 arises from the fact that this contribution was one-off and therefore permanent savings are needed in its place, although this was recognised when the budget and MTFP was agreed last year.

32. The only call that has been agreed on the Budget Resilience Reserve at present is the cost of Central Operations (CO) Tasking in 2005/06 amounting to £4m. This reduces the balance in that reserve to £18m. For 2006/07, funding for CO Tasking has been included in the budget pressures reflected in the draft MTFP.

33. Clearly, the impact of Operation Theseus is a major factor and although difficult to assess how much will be required to cover this cost, the Home Office have indicated that a significant contribution up to 1% of the net revenue budget may be required (i.e. £27m).

34. Other issues also need to be considered. For example, funding for the Bichard Enquiry response has not yet been agreed but may well be required.

35. Given these uncertainties and the volatility in the potential grant allocation, it is not possible at this stage to recommend use of reserves to reduce the precept requirement. Further consideration should, however, be given later in the budget process when the position regarding funding requirements for Operation Theseus and the forecast outturn for 2005/06 have been clarified.

36. No provision exists for redundancy costs arising from the MTFP or from Service Review proposals that may be implemented during 2006/07 nor is such a budget proposed given the intended redirection of officers and staff. However, whilst every effort will be made to ensure staff displaced are absorbed into other roles and redundancies avoided, it must be recognised that there is a potential call on reserves to fund any requirements for such costs.

Next steps

37. The MPA MTFP and Budget Submission 2006/07 – 2008/09 is required to be submitted to the Mayor by 14 November 2005. It was anticipated that a draft of that submission would be presented to this meeting. However, given the uncertainties that are still evident it has not been possible to reach that stage and work continues.

38. Further work will be undertaken on the budget development with a view to presenting the draft MTFP and Budget Submission at the MPA Full Authority on 27 October 2005. Caution is, however, required and it may be necessary to have a further meeting if outstanding issues remain. It is also likely that the Authority will need to further consider the draft budget later in the year when the grant settlement is announced, probably in December.

C. Race and equality impact

1. The individual growth and savings proposals indicated may have specific impacts on these issues. In overall terms, however, if the budget package results in a reduction of police officer numbers, or even a significantly lower level of growth, it must be accepted that the rate at which the diversity targets for police officers can be achieved will be slowed down. Growth in numbers will only be possible if the Safer Neighbourhoods proposal and Counter Terrorism funding are confirmed at levels exceeding the savings proposals in the MTFP.

2. A report on the diversity and equality implications will be submitted to the MPA Equal Opportunities and Diversity Board (EODB) when the budget proposals have been clarified.

D. Financial implications

The current financial overview is set out in Appendix 1.

E. Background papers

• Mayors Budget Guidance 2006/07
• MPS Budget Planning Instruction 1/2005
• Medium Term Financial Plans files 2006/07

F. Contact details

Report author: Sharon Burd, Director of Finance Services, MPS and Ken Hunt, Treasurer, MPA.

For more information contact:

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

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