MTFP 2007/08 – 2009/10 – financial envelope

Report: 7
Date: 15 June 2006
By: Commissioner

Summary

This report provides an assessment of the financial envelope for 2007/08 and future years and clarifies how efficiency planning, problem/demand budgets, and the Met Modernisation Programme (MMP) development projects/new initiatives are to be dealt with. The current financial projection indicates an excess of expenditure over income of £116.1m in 2007/08 and further projected budget shortfalls of £29.3m and £40.3m in 2008/09 and 2009/10 respectively. The next steps in the development of the 2007/08 Medium Term Financial Plan (MTFP) in accordance with the revised financial planning framework are set out in the report.

A. Recommendations

Members are recommended to:

1. Note the budget projections for 2007/08 to 2009/10 as set out in Appendix 1.

B. Supporting information

Budget process

1. This report provides an overview of the current projected financial envelope and funding requirements for the 2007/08 budget and subsequent years as part of a process for maintaining a rolling three year Medium Term Financial Plan (MTFP).

2. The Government is taking steps to implement a three year planning horizon in determining its grant allocations. For 2006/07, the grant settlement contained details of grant levels for 2007/08. These are subject to review but are intended to remain reasonably firm. In future years the Government is intending to give three years grant figures in its grant settlement announcements.

3. In parallel with this, it is intended that the existing MPA three year Medium Term Financial Plan be developed to improve its content for the second and third years. This will move the MPA to a more robust basis for its medium term financial and business planning.

4. At this stage grant figures for 2009/10 are not available and projections for both funding and expenditure for 2009/10 are at the very early stages.

5. Guidance is being issued to Business Groups on preparing business plans for the period 2007/08 to 2009/10 with a deadline for returns of the end of July. After this a clearer picture will emerge of the projected expenditure for all three years, together with savings/efficiency plans to address the budget gaps for each year.

Government grants

6. An announcement of general government grant for 2007/08 was made as part of the 2006/07 Home Office grant settlement, and included an increase on general grants for 2007/08 of 3.6%. No information is yet available for 2008/09 and 2009/10 and forecasts of grant income in these years have been limited to an inflation update of 2.5%.

7. In relation to specific grants, the level of new Counter Terrorism (CT) grant funding for 2007/08 was also announced at £30m in 2006/07 rising to £45m in 2007/08. Existing CT grant funding streams were, however, frozen at 2006/07 levels so that the overall increase of £15m for Counter Terrorism funding is from a base of £257.8m. It should be noted that allowing for inflation at 2.5% this represents a real increase of only £8.5m for CT funding in 2007/08 above 2006/07 levels.

8. Similarly, other specific grants have been held at 2006/07 levels in cash terms. This includes the Crime Fighting Fund grant of £72.98m and the new Special Formula grant of £54.723m. Inflationary impacts on expenditure covered by these grants will also have to be contained within the overall MPA budget. This represents a real decrease of £3.19m for these specific grants.

Mayor’s budget guidance/precept

9. An increase in the Mayor’s precept for 2007/08 has been included in the projection at 5.5% in accordance with the Mayor’s guidance issued in May 2005. For 2008/09 and 2009/10, the projected precept increase has been limited to 4% recognising the pressure to contain the overall level of precept and the rises that have been secured in recent years.

10. New budget guidance from the Mayor for 2007/08 and future years was anticipated to be received at the end of May. However, the Mayor has now asked each functional body to submit their budget projections by 9 June, PRIOR to guidance being issued. In effect, the Mayor is likely to issue a cash control total to each body at the end of June. This is likely to have a detrimental effect (especially if cash totals were set for up to three years) as full consideration of new budget pressures, MMP development projects and the Olympics preparation costs have not yet been included in the enclosed projections.

Reserves

11. The budget for 2006/07 contained a contribution of £17m from reserves, linked to one off items of expenditure in 2006/07 that does not impact in 2007/08. A further £7m was also agreed to be funded initially through reserves but savings are to be identified in 2006/07 to reduce expenditure by this amount.

12. The financial projections for 2007/08 (and future years) contain no contribution from or to reserves, at this stage, but there may be a need to consider the overall adequacy of reserves including the current policy of the General Reserve being based on 1% of the overall budget. The Treasurer is of the view that this needs to be increased to 2% in due course.

Budget projections

13. An overview of the budget projections is set out in Appendix 1. This provides for the ongoing effects of items included in the 2006/07 budget and updates to corporate provisions such as the budget for inflation. The net position as forecast is an excess of expenditure over income in 2007/08 of £116.1m. In 2008/09 there is a further projected imbalance of expenditure over income of £29.3m, and £40.3m for 2009/10 at this stage. Further details about updates of the figures are provided below.

14. The projection includes a number of items shown as Committed decreases totalling £15.2m in 2007/08. The approved budget for 2006/07 included projected reductions of £12.3m arising from the C3i/Airwave programme but once again these savings are not now expected to be delivered. Indeed, in the case of Airwave an increase of £3m above current budget levels is required and this has been reflected in Appendix 1 as an additional committed growth item. The increases are as a result of the need to maintain the dual running of Met radio and Airwave to ensure the provision of a robust radio service.

15. At present, provision is made for the implementation of the Initial Probationer Learning and Training Programme (IPLDP) in accordance with Home Office requirements for the revised basis of Probationer training. Also, proposals for additional resources for Hospital Guards have previously been deferred as part of the budget approval processes but have been included again as part of the 2007/08 proposals.

16. Following a recent decision of Investment Board, the impact of funding the Leadership Academy in 2006/07 from savings in the purchase of Livescan equipment and the phased implementation of Victim Focus Desks is included and adds £0.7m to the savings requirement in 2007/08 and a further £0.3m in 2008/09.

17. Recent information about the projected use of the Gravesend firearms facility has caused this budget to be reviewed. The expectation that a saving of £1m could be achieved in 2006/07 is not now expected to be deliverable, and further demands on usage are expected to increase costs by £1.6m, resulting in an overall increase of £2.6m in the budget.

18. The funding of Dedicated Security Posts (DSP) changed in 2006/07 from being part of the main police formula grant to being part of the overall specific grant for counter-terrorism. This change of grant status has brought into sharper focus the level of funding received for DSP compared with the true cost of filling the number of posts approved by the Home Office. Recent estimates suggest that there is a shortfall of £19.2m between the cost of the approved number of posts and those currently filled. This has been included as a committed growth item in Appendix 1. Efforts will continue to try to persuade the Home Office to reflect more realistic unit costs in this element of the CT grant in future, and also to allow for more flexibility in the use of the grant, but a prudent approach suggests we should not anticipate any increase in grant for planning purposes.

Safer Neighbourhoods/PCSOs

19. The forecast includes the full year effect of the roll out of Safer Neighbourhood teams in 2006/07. This adds £28.4m to the budget requirement in 2007/08. This is made up of an increase in costs of the teams of amounting to £44.7m offset by additional grant for the Police Community Support Officers (PCSOs) recruited in 2006/07 of £16.3m.

20. The Home Office had previously announced details of the Neighbourhood Policing Fund available for 2007/08. This provided for a further £44m for the MPA linked to the recruitment of an additional 2,844 PCSOs. It was previously assessed that if the MPA took up the offer of Home Office grant for all of the 2,844 PCSOs, the actual costs of those PCSOs would exceed the grant by circa £6.6m in 2007/08 rising to £32.6m in 2008/09. Discussions with the Home Office are on-going around seeking flexibility on the use of this resource and hopefully avoid unbudgeted costs.

21. In addition, the Home Office have now confirmed that £21.6m is available to the MPA in 2006/07 linked to the accelerated recruitment of a further 1,017 PCSOs (beyond those previously assumed in the budget), but pending final clarification of the implications of taking up further grant, this has also not yet been reflected in the budget projections.

Efficiency savings

22. The Home Office efficiency savings target for 2007/08 remains at 1.5% cashable (plus 1.5% non-cashable), but this may be increased in future years (see Appendix 1). The MPS could meet the cashable savings target in 2007/08 by a carry forward of savings in excess of the target in 2006/07. However, further savings of £32.65m, which can be cashable or non-cashable, would still need to be identified to meet the overall target.

23. In practice, the budget processes will need to identify cash savings in order to balance the budget for 2007/08 and each future year. The currently projected budget gap for 2007/08 (and for 2008/09 and 2009/10) can be seen as an initial forecast of the savings requirement.

24. A process for identifying savings has been agreed by Management Board based on the following approach:

• 1% cash savings per annum of Business Groups’ net revenue base budgets
• Further 1% cash savings across areas of the budget where there is some flexibility, exempting those areas such as free rail travel where there is none
• A further 1% of the overall budget to be set as a target yield from the focus areas selected by the VfM Steering Group.

The level of efficiency delivered by a 1% cash savings on the 2007/08 net revenue base budget is £27.8m. The full level of efficiency that can be achieved by a 3% cash saving would total £83.4m in 2007/8.

Problem/demand budgets

25. A review of current problem and demand led budgets was carried out as part of the financial planning framework review. This has been updated and out turn review meetings (of the 2005/06 budget) are also currently being held with all Business Groups. A number of the issues have been addressed in setting the 2006/07 budgets but a small number of demand led budgets are likely to require further increases in future years. Investment Board agreed that a sum of £10m should be included within the financial projections in order to augment these demand budgets (as listed in Appendix 1).

26. The budget for early severance payments to police staff has for some years been set at £0.4m. Actual costs have exceeded this sum and have been managed in year. It is intended in future that these costs should be charged to Business Groups to reinforce the issue of affordability in management’s consideration of such cases. In this way it is hoped to avoid the need for any further budget increase.

MMP development projects/new initiatives

27. The budget for 2006/07 contained a sum of £7m for new initiatives (although a number of other items were included as committed increases). Further new initiatives/budget pressures may also arise for 2007/08 and/or future years that are not currently reflected in the financial projections. In addition, no additional financial provision was included for 2007/08 for any of the MMP development projects currently reflected in the Corporate Strategy.

28. It is already known that some additional provision will need to be made for 2012 Olympic planning costs from 2007/08 onwards, whilst new pressures e.g. arising from national requirements, or internally, since the lists of committed increases etc were compiled last year are likely to arise. The projections for 2009/10 in particular do not include any increases other than inflation/pay awards.

29. Investment Board agreed that a sum of £30m should be included in the projections for a Modernisation Initiatives Fund from 2007/08 onwards and this is reflected in the projections at Appendix 1.

Next steps

30. The budget projections set out in this report outline the overview financial position for 2007/08 and the next two financial years. Guidance to Business Groups is being issued to enable them to prepare Business Plans covering all their activities by end July in accordance with the proposed new arrangements for strategic/financial planning. When the returns have been received decisions on planned activities and savings/efficiencies can be made. Further reports will be submitted to Finance Committee following this process.

C. Race and equality impact

There are no equalities or diversity issues arising specifically from this report. Consideration of the implications of the MTFP for equalities and diversity will be included in the Budget Submission in accordance with the Mayor’s guidance.

D. Financial implications

The financial implications are as set out in the report.

E. Background papers

• Home Office 2006/07 grant settlement notification letters
• 2006/07 MTFP Budget Submission papers

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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