Medium Term Financial Plan 2008/09 – 2010/11 Financial Envelope

Report: 5
Date: 3 May 2007
By: Acting Director of Resources on behalf of the Commissioner and the Treasurer

Summary

This report provides an initial assessment of the financial envelope for 2008/09 and future years. The next steps in the development of the 2008/09 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 initial budget projections for 2008/09 to 20010/11 as set out in this report.
2. Note the ongoing work in support of balancing the 2008/09 budget.

B. Supporting information

Budget process

1. This report provides an overview of the current projected financial envelope and funding requirements for the 2008/09 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. Following a two year grant settlement in 2006/07 the grant settlement for 2007/08 was for just one year as it coincided with the end of a spending review period. Consequently no firm indications of the level of funding for 2008/09 have been received at this point. In future years the Government is intending to give three years grant figures in its grant settlement announcements.

3. In parallel with this, in last year’s process the existing MPA three year Medium Term Financial Plan was developed to improve its content for the second and third years to move the MPA to a more robust basis for its medium term financial and business planning. This will continue in this year’s process.

4. Guidance will be issued at the beginning of May to Business Groups on preparing business plans for the period 2008/09 to 2010/11 with a deadline for returns of the end of June. 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

5. The funding position for 2008/09 onwards looks bleak and our financial position is likely to be very challenging in the foreseeable future.

6. The Home Office budget is expected to be frozen in real terms and there are funding pressures in other areas of its responsibility which are likely to have an impact on the overall funding for policing. The current assumption for Home office grant is an increase of 1.5%. Marginal upward changes in this assumption will not significantly assist in reducing the budget gap. For example every 0.5% change in grant would increase/decrease grant by £9.5m.

7. Most specific grants for 2008/09 are expected to be held at 2007/08 levels in cash terms so inflationary impacts on expenditure covered by these grants will have to be contained within the overall MPA budget. The only specific grants assumed to increase over their 2007/08 levels are Olympics preparation funding and the funding anticipated for Dedicated Security Posts (DSPs). The current assumption is 0% for existing specific grant.

8. Significant pressures such as the 2012 Olympics and future Counter Terrorism requirements are being developed into formal bids to the Home Office for extra funding. These are also part of the submission to the Home Office Comprehensive Spending Review for 2007 (CSR07). We want to ensure the HO is aware of the significant increase in funding required to deliver these requirements. The shortfall on funding for the MPS national/international & capital city functions, estimated at £150m has been included in the CSR07 submission.

Mayor’s budget guidance/precept

9. Increasing Olympics’ costs will present significant issues for the GLA precept and the Mayor is likely to want to keep the MPS precept increase at a lower level than recent years, the current assumption is an increase of 2.5%. Again, marginal percentage changes in the precept do not significantly impact on the size of the budget gap. For example every 0.5% change would increase/decrease the precept income by £3m.

10. New budget guidance from the Mayor for 2008/09 and future years is anticipated to be received at the end of May.

Balancing the budget

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

12. Following on from the need to make revenue savings in the region of £65m to £90m in each of the 2006/07 and 2007/08 financial years, it is clear that the challenge ahead is significant and requires the MPS to focus effort not just on delivering an effective service, but on doing so in the most efficient way possible. Both the MPS and MPA need to recognise that there is limited potential for the continuing gap to be met purely by focusing on ‘discretionary budgets’ and back-office/support functions.

13. The magnitude of the budgetary pressures in the medium term requires us to consider all possible options for areas of saving in the future. There is a clear need to work particularly closely with the MPA in ensuring a realistic and sensible approach to possible options.

Reserves

14. It is important to maintain the authority’s hard won financial stability and at present there seems limited opportunity to use existing reserves to assist budget planning within present policy, which is to try and achieve general reserves at a level of 2% of net revenue spend, as and when conditions allow (they are presently 1.7%). However, a full report will be made to the June Coordination and Policing meeting, which will assess opportunities for members to consider creating some form of budget resilience reserve.

Funding formula

15. Tony McNulty’s letter to Chairs and Chiefs, dated 14 February and headed Police Reform and Protective Services, sets out a ‘four element strategy’ including:

'iv.) The Home Office will address the police financing landscape the better to balance the protective service priority and the means of delivering such services, increasingly through joint approaches.’

16. Specifically under a heading of Funding, the letter states that ‘funding must take account of the joint arrangements that are developed to deliver policing services and the level of need that is faced.’ The Minister does ‘not expect to be able to provide additional money’ so there will need to be better use of existing resources. However he will examine, with ACPO and the APA, ‘whether the funding formula needs to be modified to consider protective service risk once we have a framework of assessment.’ Any redistribution of general grant made as a result would remain subject to floors.

17. The timetable attached to the letter suggests that work on a revision to the funding formula will begin by October 2007. This would follow publication of HMIC’s national framework for protective service risk assessment (due by July 2007). By mid 2008 The Home Office ‘will conclude work on the funding formula for possible implementation from 2009/10.’

18. Clearly if any changes to the funding formula are proposed it will impact later in the process, but it does appear that what is being proposed here is an examination of whether the funding formula needs to be modified. It is too early to speculate whether there will be changes, good or bad.

Business planning issues

19. The key to delivering a robust and balanced budget is by starting the planning process early. The timescales have therefore been brought forward a further two to three months compared to those in the 2007/08 budget process.

20. Work has begun on a number of levels and by a range of individuals with different areas of expertise.

1. Finance Services are working to create a robust MTFP/strategic outlook;
2. The Productivity Group are further developing their role in determining efficiencies across the organisation – and ensuring the ‘efficiency’ approach is embedded within the organisation;
3. The Met Modernisation Programme to ensure business benefits to deliver real business efficiencies;
4. Consider and develop further innovative and creative opportunities to ‘mould and change’ the services we deliver.

21. The initial work on the 2008/09 budget will be led through a new Budget Working Group. Its role is to work with a cross-business group that is required to take a corporate view in assessing planning options for dealing with the budgetary pressures. The group will provide early advice to the Management Board on the options for dealing with the budget and is meeting weekly, recognising our commitment to make progress.

22. A Productivity Strategy Board is in place (chaired by the Deputy Commissioner) to oversee the programme of work to deliver a more efficient service. This includes the further development of existing work (including the relevant strands within the MMP), a detailed analysis of corporate overheads and the development of a rolling programme of 'service improvement reviews', which will have a productivity focus. This work is inextricably linked to the budget planning process for 2008/09 and beyond.

23. The opportunities for a fundamental review of key budgets in one significant area that is being explored and the results will support the 2008/09 budget process.

24. The Authority will be kept regularly informed, both through Finance Committee and the joint meetings of Finance/PPR Committee. Additionally it is planned to have the first draft of the business plan available for the September meeting of the full authority, earlier than last year, allowing time for the final budget to be agreed by the full Authority in October.

C. Race and equality impact

1. 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

1. The financial implications are as set out in the report.

E. Background papers

• 2007/08 Business Plan and Budget Submission papers

F. Contact details

Report author: Simon Hart, A/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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