2006/07 provisional grant settlement and budget implications

Report: 08
Date: 19 January 2006
By: Treasurer

Summary

The report summarises the contents of the 2006/07 provisional local government finance settlement as they impact on the MPA. The financial effects are explained and a requirement for additional £7 million corporate savings is proposed.

A. Recommendation

That members

1. Note the initial conclusions of the impact of the provisional grant settlement in the context of the draft budget submission (paragraph 24);
2. Agree that an additional £7 million corporate savings be made to the 2006/07 draft budget (paragraph 26);
3. Commission the MPS to bring forward to the next appropriate meeting of the Authority/Finance Committee a paper on the recruitment and staffing consequences of the draft budget incorporating an assessment of the effects of the safer neighbourhoods and counter terrorism bids (paragraph 27);
4. Receive the updated advice on the reserves and robustness of the estimates (paragraph 28 - 30); and
5. Agree a policy of increasing the General Reserve from 1% to a higher percentage of net revenue expenditure as and when conditions allow (paragraph 29).

B. Supporting information

Provisional Grant Settlement announcement

1. This is an extremely complicated settlement. The provisional local government finance settlement for 2006/07 and 2007/08 was announced on 5 December. Information relevant to the Metropolitan Police Authority has been provided by both the Office of the Deputy Prime Minister (ODPM) and the Home Office. There remain a number of unresolved issues particularly in relation to counter terrorism grants to be allocated by the Home Office. There are transfers of grant to reflect changes in funding arrangements for police pensions as well as transfers between formula grant and special grants for counter-terrorism. However, there is sufficient information to allow broad conclusions as to the Authority’s grant funding for next year.

2. Detailed Letters from the Home Office setting out specific information for the Metropolitan Police Authority and the ministerial statement on the police funding announcement have been lodged in the Members’ Room.

National position

3. The total national provision for police underpinning the settlement provision is £10,570M which is an increase of 5% over 2005/06. However, within this overall increase, central spending on police has increased by 7.5%, and earmarked funding for police authorities by 5.2%, so that the residual total available for distribution generally to police authorities (police grant, RSG/NDR) has only increased by 3.4% (3.7% in 2007/08).

4. Changes in the year on year grant entitlement are being damped again by a system of floors. For police authorities the floor, or minimal increase, is 3.2%.

5. The review of the police grant distribution formula has resulted in the model (unfavourable to the MPA) known as ‘POL 2’ being introduced. This was a full review with 7 categories of crime being incorporated. The MPA did not support this model, however Ministers decided to use what they regard as the most comprehensive and technically robust option. Fourteen out of the forty-five responses to the original consultation supported this option. Implementation of the option places the authority £36.2M below the floor, but a severe system of scaling-back grant increases to police authorities above the floor results in a national average grant increase of 3.262%, with a range between 3.2% to 3.56%. Without damping the authority’s increase would have been 1.15%. It must be considered unlikely that the new formulae will be fully phased in over the short to medium term, but this is an issue for the authority to be on its guard against when responding to further consultations on grant in future years.

6. The government has introduced a new system of pensions funding so that police authorities will make an employer contribution for each officer, with shortfalls in pensions payments being met by central government. In moving to this new system the sums of £313M for 2006/07 and £328M for 2007/08m are being taken out of formula funding with similar sums to be provided to cover authorities’ costs.

7. The total of national specific grants for police authorities has increased by 8.6%.

8. Funding of £576 million previously allocated for the dedicated security posts and the pensions element of the formula has been transferred out of formula grant and will form part of a special counter-terrorism grant and a new central Home Office grant supporting net pension costs.

9. Four specific grants have been merged and included as part of general grant funding: Rural Policing Grant ((£30M) of which the MPA receives none), Special Priority Payments (£69M), London and South East Allowances (£48M) and Forensic Grant (£46M). Police authorities will have flexibility as to how this funding is used but Ministers have made it clear they expect authorities to honour commitments and agreed policy initiatives associated with these grants. The level of funding they provide has been frozen at 2005/06 cash prices. It is likely they will remain at these levels in future years.

10. The MPA higher civil staff pension costs uplift has been maintained by a switch of £15M from formula grant to the special payment which until now had been solely for national, international and capital city functions.

11. No indications are provided on the expected level of efficiency savings except that the government continues its commitment to improving efficiency and effectiveness. It can therefore be assumed that the 3% target remains (of which a minimum of 1.5% must be cashable).

12. Council tax increases are expected to be an average of 5% or less as was the case for 2005/06.

13. There is no indication of the level of capital funding provided at this time. This will be announced later in January.

Impact on the MPA

14. The following paragraphs provide further commentary on the components of the total grant funding as they affect the MPA. However, it must be stressed that we do not yet have the complete picture on the settlement.

15. The Government has now announced minor changes to previous year’s formula grant in 2004/05 and 2005/06 correcting data errors. These are known as Amending Grant changes and the net effect of these changes is additional grant totalling £5.249M.

16. The changes made to the way that counter terrorism and net police pensions are funded resulted in £165.2M being transferred from general to specific grants. This included a proportion of the MPS special payment which was initially attributable to counter-terrorism (£50M) leaving £115.2M as the dedicated security post counter terrorism/pensions adjustment. It was estimated that £115 million of this figure was counter terrorism based, which we expected to recover through the allocation of the new security grant – the new Single Consolidated Grant.

Police pensions budget changes

17. A consequence of the revised arrangements for police pensions financing is that existing pensions budgets held in the revenue account are replaced by employer’s pensions contributions. The MPS has undertaken a detailed exercise to replicate this and the net effect of these transactions is a net surplus (reduced expenditure) on the revenue account of £19.425M. Any deficits on the Authority’s net pension costs will be met from a central specific grant managed by the Home Office.

Formula distribution

18. Some 90% of the MPA’s grant funding comes vial the general distribution arrangements relying primarily on the police allocation formula. The provisional settlement total of the principal police grant (including the special payment), revenue support grant (RSG), and non-domestic rates (NDR) is £1,820.045M, a decrease of £169.69M over the equivalent figure for 2005/06, primarily the result of counter-terrorism and pension transfers.

19. The special payment, which recognises the MPS’ national and capital city functions, is contained within the principal police grant allocation (identified above). The figure for 2006/07 has been decreased by £36.9M to £187M. This figure now includes £15M of the former civil staff pensions uplift formerly provided from formula grant.

Civil staff pension uplift

20. While the initial protection of the £15M MPA civil staff pension uplift by way of transfer to the special payment is welcome, the special payment is included in the damping arrangements. The £15M does not therefore result in the cash increase that this implies. Removal of the £15M into a undamped pot of police grant would be more appropriate and achieve the Home Office’s desired intention.

Neighbourhood Policing Fund

21. Funding from the Neighbourhood Policing Fund shows an increase of £16.3M for PCSOs in 2006/07. This was already taken account of in the estimated net costs of rolling out safer neighbourhoods. There is to be a further increase of £60M in 2007/08. The MPS are seeking more flexibility in the proposed conditions attached to this grant.

Specific grants

22. The various specific grants, including the newly amalgamated DNA/ Special Priority Payment/London Pay Lead grants shows a net reduction of £46.506M. This is primarily the result of the withdrawal of the counter-terrorism grant (£61M), offset by the increase in the Neighbourhood Policing Fund.

Counter-terrorism funding

23. There are three elements to this funding: (a) Dedicated Security Posts, (b) the top slice of the special payment and (c) the former counter-terrorism specific grant. The Authority was notified on 22 December about the Dedicated Security Post element (£115.8 million). No details have been announced about any grant condition changes that might apply. It is understood that nationally some additional 150 DSP posts have been approved, but the overall sum available for distribution is unchanged. The two other elements have not yet been announced. In addition the outcome of the new bid for additional counter-terrorism support is also still awaited. Until these figures are known the outlook for the budget cannot be assessed accurately. The financial estimates for these three elements that are currently included in the draft budget are:

Budget implications

24. The budget implications are complex because not only does formula grant and specific grant change, but the original budget reduces because of the pensions financing change. The changes to the budget requirement, government grant figures and net requirement to be met from the precept, including the full roll-out of safer neighbourhoods is as follows:

Table 1

For comparison purposes the comparable ‘net requirement’ figure included in the original budget submission (i.e. before the provisional grant settlement and pensions changes) showed a precept requirement of £623.1M (including the full roll out of Safer Neighbourhoods). The various changes above represent an improvement of £10.5M.

25. The Mayor’s consultation document on the GLA Group Budget Proposals and Precepts 2006/07 issued on 14 December has adopted both the budget requirement and precept requirement shown in Table 1 above. The Mayor’s overall budget is at present approximately £24M in excess of a 5.5% council tax increase and £28.5M in excess of a 5.0% tax increase.

Further savings

26. The GLA Executive Director of Finance and Performance wrote to GLA group Chief Finance Officers on 14 December (copy tabled at the Finance Committee on 15 December) and amongst other issues said that the Mayor has made it clear that he will be working across the GLA Group to see how the net expenditure requirement can be reduced further and so reduce the increase necessary in the GLA council tax precept. It has been indicated that £7 million additional savings will be required. If Members support this reduction it would be appropriate at this stage of the budget preparation to identify the £7 million as corporate savings still to be identified. In view of the size of the savings requirement in comparison to the total budget this is not felt to be an unmanageable risk and the Director of Resources has supported this approach. The budget requirement would reduce to £2,425.7 million and the precept would be £605.6 million.

Staffing implications

27. Members have previously asked to see the staffing implications of the 2006/07 budget. It will be difficult to get a comprehensive picture until the counter-terrorism grant and the additional CT bid is known. It would be appropriate for the MPS to bring forward to the next appropriate meeting of the Authority/Finance Committee a paper on the recruitment and staffing consequences of the draft budget incorporating an assessment of the effects of the safer neighbourhoods and counter terrorism bids.

Reserves

28. Detailed consideration of the authority’s reserves was included with the initial draft budget submission in November. The only relevant factor, which has emerged since, is the notification of an additional £20M special grant from the Home Office in respect of Operation Theseus (bombing and attempted bombings). The success of the action taken by the MPS on a managed revenue underspend in the current year together with the additional special Home Office grant should now make unplanned large scale drawdown from reserves unnecessary.

29. The move since 7/21 July into the ‘new normality’ does impact on the view as to what a reasonable level of General Reserves should be. Clearly, a minimum level of 1% of net revenue expenditure (presently £27M), without the flexibility of a large amount of uncommitted special reserves and a large underspend on the revenue account would have made dealing with significant additional costs almost unmanageable. Members may now wish to support a policy of increasing the General Reserve towards a higher percentage of net revenue expenditure (perhaps 2%) over a period of time and as circumstances allow.

Statement on robustness of the estimates

30. The Treasurer’s statement on the robustness of the estimates was incorporated in the November Budget Submission. At that point in time uncertainty was expressed in relation to the level of receipt of additional special grant in relation to the bombings/attempted bombings. That uncertainty has now been resolved satisfactorily.

Issues for response to the consultation on Formula Grant

31. Issues for response to the consultation on Formula Grant. A response to the consultation paper has been made which incorporates the issues identified above. In particular:

1. That the grant consultation is only partial and the late notification of counter-terrorism grant is unacceptable, particularly bearing in mind the deadlines imposed by the Mayor’s budget process;
2. The notification of the 2007/08 neighbourhood Policing Fund is welcome, but there is a need for additional flexibility around the grant conditions;
3. To benefit from the incorporation of the £15 million civil staff pension uplift the grant should be moved from the special payment to an alternative grant source which is not subject to damping arrangements; and
4. Attention is drawn to the unwelcome effects on service delivery if the POL 2 formula were ever to operate freely without damping.

C. Race and equality impact

There are no direct equality and diversity implications arising from this report.

D. Financial implications

These are shown above.

E. Background papers

None

F. Contact details

Report author: Ken Hunt. Treasurer, MPA.

For more information contact:

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

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