2005/06 revenue budget

Report: 7
Date: 16 December 2004
By: Treasurer and Commissioner

Summary

The report updates members on developments since the draft budget for 2005/06 was agreed for submission to the Mayor, subject to further review following the grant settlement. Budget reductions of £20 million have been identified following a corporate review. The outcome of the provisional grant settlement is reported, the net result of which is a further improvement of £21.2 million in the budget position.

A consultation letter has been received from the Mayor and this will be the subject of discussion between the Mayor and the Chair of the Authority at a meeting on 9 December. A supplementary report will be circulated following that meeting.

A. Recommendation

Members are recommended:

to approve the final budget submission to the Mayor, reflecting the provisional grant settlement, corporate budget reductions of £20 million and any further adjustments following discussion with the Mayor.
to endorse or amend the points suggested for inclusion in the MPA’s response to the consultation on the grant settlement.

B. Supporting information

Introduction

1. At its meeting on 28 October 2004 the full Authority agreed to forward the draft budget submission to the Mayor to meet his deadline of 8 November on the basis that it would be subject to further review following the announcement of the grant settlement. The authority also agreed that work should continue to identify options for reducing the budget so that they are available for consideration once the grant settlement is announced.

Summary of draft budget as submitted

2. The following table summarises the budget as submitted showing the position after inclusion of option D from the Step Change business case, which is the MPS’s preferred option for implementation.

	2004/05 (£m)	2005/06 exc SCP (£m)	Variance from 04/05 (%)	2005/06 inc SCP (£m)	Variance from 04/05 (%)
Net expenditure	2,567.6	2,703.4	5.3	2,752.0	7.2
Specific grants	200.6	206.3	2.9	215.6	7.5
Transfer from reserves	23.7	11.0		11.0
Budget requirement	2,343.3	2,486.1	6.1	2,525.4	7.8
General formula grants	1,822.0	1,913.1	5.0	1,913.1	5.0
Precept requirement	521.3	572.9	9.8	612.3	17.5

3. The Authority agreed that a precept increase of 17.5% would be unsustainable especially in the context of potential council tax capping.

4. Since the Authority’s meeting in October there has been a corporate review of the budget and further proposals for expenditure reduction have been identified (see paragraph 30 below). The provisional grant settlement has been announced and details are set out in the following section of this report. The Mayor has just issued his letter consulting the Authority on his proposals for preparing his draft component budget, as reported at paragraph 35 below. This will be discussed at a meeting between the Mayor and the Chair of the Authority on the afternoon of Thursday 9 December. A supplementary report will be circulated to members following that meeting.

Grant settlement: national position

5. The provisional grant settlement for 2005/06 was announced on 2 December 2004. Information has been provided on the general grant allocation and the distribution of a number of specific grants.

6. There is an increase of 6.7% in the overall national provision for policing. This includes central funding and capital grants as well as grant funding for police authorities. Total revenue grant funding for police authorities increases by 5.1% including an increase of 4.8% in total formula grant. The following table provided by the Home Office shows the allocation of the national total.

Police funding settlement for 2005/06 compared to 2004/05 [1]

	2004/05 (£m)	2005/06 (£m)	Increase (£m)	Increase (%)
1. Direct funding for police authorities
Home Office Police Grant	4,380	4,574	194	4.4
Revenue Support Grant/Business Rates	2,889	3,045	156	5.4
Total General Formula Grant	7,269	7,619	350	4.8
Assumed Local Funding [2]	1,699	1,753	54	3.2
Total Formula Grant Spending Provision	8,968	9,372	404	4.5
Specific Grants for police authorities	708	766	58	8.2
2. Capital Grants & Support	355	358	3	0.8
3. Central Spending
Policing [3]	491	653	162	33.0
Crime Reduction	164	172	8	4.9
Counter Terrorism, International and Organised Crime [4]	401	512	111	27.7
Grand Total	11,087	11,833	746	6.7

7. A floor of 3.75% has been set so that no authority will receive an increase in 2005/06 less than 3.75%. There are no ceilings on grant gains but all authorities receiving more than a 3.75% increase have had their entitlement reduced proportionately to subsidise the floor. The resulting range of grant increases is from 3.75% to 6.9%.

Grant settlement: MPA allocation

8. The table at Appendix 1 compares the MPA grant allocations notified by the Home Office with the figures assumed in the budget submission considered by the Authority in October and identifies the impact on the draft budget.

General grant

9. The MPA’s formula grant allocation (comprising police grant, revenue support grant and non domestic rates) represents an increase of 5.8%, which is the third highest increase in the country, and contrasts with the budget assumption of a 5% ceiling. This is still a significant shortfall on our formula grant entitlement which, without the need to subsidise floor authorities, is £48 million higher than our actual allocation.

10. In addition to the 2005/06 formula grant increase the MPA will also receive in 2005/06 a one-off sum of £4.2 million under the 2003/04 amending report. This arises from corrections to the population data used in that year’s formula. In total the Authority’s general grant increases by £110 million and is approximately £19 million more than assumed in the initial budget submission agreed by the MPA in October.

11. Included within the general grant allocation is a £10 million increase, 4.8%, in the special payment.

Specific grants

12. Confirmation has been received of the MPA’s entitlement in respect of most of the specific grants. Reasonable estimates can be made in respect of the remaining grants. The following paragraphs set out briefly the position on each grant.

Crime fighting fund (CFF)

13. The CFF is expected to be absorbed into the new neighbourhood policing fund from 2006/07. In the meantime it is being held at the same cash amount as 2004/05.

Counter terrorism

14. The MPA allocation of counter terrorism grant is £61 million which comprises the Authority’s share resulting from last year’s settlement plus the additional £12 million approved in April 2004. This is not therefore ‘new money’ but is £14 million more than is currently included in the budget submission. It is assumed that we need to increase the budgeted expenditure to match.

BCU fund

15. This is funding which was first provided in 2004/05 and is intended to be allocated direct to basic command units (BCUs), borough commands in our case, for crime reduction initiatives in partnership with CDRPs. The total allocation to the MPA is unchanged for 2005/06. We have not reflected this in our overall budget since it will have to be matched by additional expenditure at the borough level.

Neighbourhood policing fund (NPF)

16. This reflects the allocation of the £50 million national provision to fund additional community support officers (CSOs) to be recruited in the current year. The MPA has received approval for 250 CSOs compared with an assumption of 375 built into the Step Change business case. The allocation covers costs over fifteen months with a full year value of £6.1 million. This is £3.1 million less than had been assumed in the business case but it is assumed that expenditure can be adjusted to match without affecting delivery of the proposed option (see paragraph 31 below).

Special priority payments

17. This grant part funds payments arising from the PNB pay reform package agreed in 2002.

DNA expansion programme

18. The MPS is clarifying the treatment of this funding in the draft budget. There may be an element of double counting.

London allowance (pay lead)

19. This allowance is paid to officers who joined the service since 1994. It is therefore increasing annually. The specific grant funding meets about two thirds of the cost.

Free rail travel

20. Government support for free rail travel is maintained at the previously agreed amount. Members will appreciate that the costs have increased substantially and they are not therefore matched by any additional grant.

Airwave

21. This is the final instalment of revenue grant to support implementation of the Airwave radio system. Notification of this grant was received in October after the draft budget had been prepared and it was agreed that it would be brought into account at the time of the settlement.

Loan charges grant

22. This grant is not referred to in Home Office documentation because it is administered by ODPM. It is based on historic calculations of outstanding debt and should continue to be paid as a gradually reducing amount for some years to come.

CSO grants 2002/05

23. Prior to the initial allocation from the neighbourhood policing fund there had been three bidding rounds for funding for CSOs. The Home Office ministerial announcement of the settlement refers to continuation funding but we have not been specifically notified of our allocation. However the future payment arrangements have been spelt out previously and it is unlikely that the allocations will differ significantly from the estimates already included in the draft budget.

Street crime

24. The draft budget assumed continued street crime funding at the level provided in 2004/05. It is now clear that this was not the Home Office’s intention. In fact there is a small residual provision nationally for 2005/06 amounting to £6.5 million. The MPA would expect to receive a proportion of this but probably no more than £2.5 million as opposed to the £12.5 million included in the draft budget. The risks around this budget provision were identified in the budget submission where it was made clear that expenditure would have to be reduced on a matching basis if the grant was not forthcoming. Budgeted expenditure will therefore have to be reduced by £10 million.

25. It is considered that the specific grant figures reflected in Appendix 1 should be broadly reliable. After allowing for associated expenditure changes they result in a net improvement of just £2 million on the draft budget incorporated in the submission, so the overall impact of the settlement, including both general and specific grants, is an improvement of £21.2 million over the submission.

Response to consultation

26. The provisional grant settlement is subject to consultation with a closing date of 11 January 2005. It is suggested that the Authority’s response should cover the following points

27. The Authority welcomes the greater flexibility built into this settlement in response to the issues raised with ministers by the Mayor and the Chair of the Authority. In particular the Government has allowed the distribution formula to operate and eased the constraint represented by a grant ceiling. The increase in the special payment recognises the Authority’s concerns that national, international and capital city responsibilities were not being fully funded.

28. However there are a number of reservations:

Our actual general grant allocation still represents a substantial shortfall from our formula entitlement. What are the Government’s plans for moving closer to a position where authorities receive their full formula entitlement?
The increase in the special payment is less than the funding shortfall identified in the consultants’ report earlier this year. It is also subsumed within the overall 5.8% increase and therefore subject to the same limitations resulting from the requirement to fund floor authorities. Given the continuing security situation there is a need to keep under review the resulting demands on the MPS and to have a continuing dialogue with the Home Secretary who remains responsible for the national/international activity.
There is disappointment at the MPA’s allocation from the initial tranche of the neighbourhood policing fund. The Authority would want to be involved at an early stage in discussions about the distribution process for the fund from 2006/07 onwards.

29. Members are asked to endorse or amend this proposed response.

Corporate review of expenditure

30. Corporate provisions within the draft budget have been re-examined in the light of latest information and reductions totalling £20 million have been identified, representing a 3.8% reduction in the precept requirement. The proposals are detailed in Appendix 2 and have been endorsed for inclusion in the budget by the Finance Committee.

Step Change programme

31. The Government’s decision to fund only 250 community support officers under the initial distribution from the NPF has potentially increased the net cost of the preferred option for the continued implementation of Step Change. However the costings of the programme have been reviewed and the proposed package can still be delivered next year within the total cost of £39.4 million included in the budget submission. The full complement of neighbourhood teams will still be provided for the whole year. The timing and costs of other elements of the package will be adjusted. Any significant reduction below the cost included in the submission would compromise the balance of the package.

32. If the Authority approves the Step Change proposals as currently reflected in the budget submission, with the clear support of the Mayor, commitments will have to be made during the final months of the current year to ensure that five new neighbourhood teams per borough are in place by April 2005. The additional costs against this year’s budget will be limited. The cost of new PCSOs will be largely covered by the NPF funding. The police pay forecasts to the end of 2004/05 reflect a projected over-strength in the final months whilst still showing an underspending against the budget. Resourcing the neighbourhood teams will mop up the excess number of officers without any impact on the currently forecast spending position. Any additional costs will only be incurred for a matter of two or three months at most. It is therefore estimated that additional costs will not be significant and can be accommodated within the forecast underspending, based on the latest budget monitoring, of £2.8 million.

Amended budget position

33. The following table sets out the latest budget position following the grant settlement and the incorporation of £20 million of corporate expenditure reductions.

	2004/05 (£m)	2005/06 exc SCP (£m)	Variance from 04/05 (%)	2005/06 inc SCP (£m)	Variance from 04/05 (%)
Net expenditure	2,567.6	2,752.0	- 18.1	2,733.9	6.5
Specific grants	200.6	215.6	+ 3.0	218.6	8.9
Transfer from reserves	23.7	11.0	+ 1.0	12.0
Budget requirement	2,343.3	2,525.4	- 22.1	2,503.3	6.8
General formula grants	1,822.0	1,913.1	+ 19.1	1,932.2	6.0
Precept requirement	521.3	612.3	- 41.2	571.1	9.6

34. Thus the precept requirement at this stage, including the preferred option for Step Change, represents an increase over 2004/05 of 9.6%.

Consultation by the Mayor

35. The letter from the Mayor, which was received on 7 December, is attached at Appendix 3. This will be the subject of discussion between the Mayor and the Chair of the MPA on 9 December. A further report will be provided to members following that meeting. The following comments are made in advance of that discussion.

36. The Mayor refers to the Government’s announcements concerning capping. In introducing the settlement the Minister of State for Local Government said that the Government expects the national average increase in council tax to be less than 5%. Capping criteria have not been published and will probably not be until after budgets have been set. In our case capping applies to the Mayor’s overall precept. The Mayor’s proposals clearly have regard to the potential for capping.

37. The letter specifically proposes deletion of the provision to establish an Olympic planning team currently included in the draft budget under ‘new initiatives’ on the grounds that this will be funded from the Olympic support budget if the Olympic bid is successful.

38. The letter then proposes a further reduction of £10 million from further savings or use of reserves. It is clear from paragraph 5 of the letter that the Mayor does not envisage further savings coming from the Step Change proposals.

39. The question of the future requirements for pensions reserves has been explained to the Authority previously. It is appropriate that this should now be addressed in the context of the Mayor’s request for a further reduction in the budget requirement. It is intended to provide full supporting information for proposals in relation to the Authority’s pensions reserve in the supplementary report.

40. The reference in paragraph 4 to the possible use of specific grants to defray existing costs stems from the arguments put to ministers which included a suggestion that there should be flexibility around counter terrorism grant so that it could fund existing additional counter terrorism activity. In practice, as stated in paragraph 14 above, there is no new counter terrorism grant in the settlement and the grant will have to be applied to the purposes for which it was approved.

C. Race and equality impact

The equality and diversity implications of the budget were fully addressed in the submission to the Mayor

D. Financial implications

The budget provides the approval for expenditure during 2005/06.

E. Background papers

MPA/MPS budget files

F. Contact details

Report author: Peter Martin

For more information contact:

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

Appendix 1: Impact of Grant Settlement

	2004/05 settlement	Draft submission 2005/06	Provisional settlement 2005/06	Difference from draft submission	Notes
Central funding allocated by national formula
Police Grant - main	916.084		960.238
RSG	598.829	1,695.731	630.901
NNDR	100.069		119.899
Amending report 2003/04	-	-	4.200
Totals	1,614.982	1,695.731	1,715.238	19.507
Special Payment	207.000	217.350	217.000	-0.350
Total general grants	1,821.982	1,913.081	1,932.238	19.157
Hypothecated Grants
Crime Fighting Fund	72.980	75.170	72.980	-2.190	[1]
Loan charges Grant	3.500	3.400	3.400	0.000	[2]
Pay Lead Grant	26.981	31.517	34.000	2.483
DNA Expansion Programme Grant	4.600	4.600	-	-4.600	[3]
Free train travel for police officers	2.500	3.081	3.081	0.000
Airwave grant	-	-	6.140	6.140	[4]
CT grant	52.200	47.000	61.000	14.000	[5]
PCSOs recruited in 2002/03	15.000	10.831	10.831	0.000	[6]
PCSOs recruited in 2003/04	-	3.505	3.505	0.000	[6]
PCSOs recruited in 2004/05	-	0.421	0.421	0.000	[6]
Police reform - Special Priority Payments	10.300	14.352	14.610	0.258	[7]
Street Crime	12.500	12.500	2.500	-10.000	[8]
Totals	200.561	206.377	212.468	6.091
Total funding excluding Step Change	2022.543	2119.458	2144.706	25.248
PCSO funding for Step Change Programme	0.000	9.200	6.125	-3.075	[9]
Totals	2022.543	2128.658	2150.831	22.173
Adjustments to budgeted expenditure:
Counter-terrorist expenditure				14.000
Street Crime				-10.000
Step Change funding for PCSOs				-3.075
Total				0.925
Net difference from draft budget				21.248

Notes:

Inflation included in general grant
Latest estimate
Accounted for within SCD budgets
HO letter 20 October 2004
Increase in budgeted expenditure
MPS calculation of amount will receive
MPS estimate
MPS estimate - reduction in expenditure
To be offset by reduction in new expenditure on SCP

Appendix 2: Budget Submission 2005/06: Proposed Further Reductions

Proposition		£k
1.	Reduced police pensions expenditure	4,400
	Increased police pensions income	1,100
	Revised assessment of pensions costs and income based on latest forecast information.
2.	Police staff employers pension contributions increase to be phased across 2005/06 and 2006/07	3,300
	Cabinet Office has decided to phase in the increase in superannuation contributions. The overall increase will still be around 45% higher than at present, but it will be spread such that about 38% falls in 2005/06, with the remaining 7% in 2006/07.
3.	Balance of overhead charged to TfL following decriminalisation (50% already claimed by TP)	1,500
	Additional income that will not be allocated to individual support department budgets
4.	Increase police overtime savings to meet revised PNB target of £1.9m	700
5.	Reduce police officer pay budget to reflect lower average pay rates	5000
	Budget monitoring 2004/05 shows average cost of police officers pay to be too high
6.	Reduce price inflation from 2.5% to 2%	3,000
	Current budget provision @ 2.5% on c. £600m expenditure is £15m
7.	Increase use of pension reserve by £1m to £12m	1,000
	Revised pension calculations show 145 extra retirees in 2005/06 x £83k lump sum
	Total	20,000

Appendix 3: Letter to Len Duvall from Ken Livingstone, Mayor of London

Len Duvall
Chair, Metropolitan Police Authority
10 Dean Farrar Street
London SW1H ONY

Our ref: KL/Budget/Police

Dear Len

2005-06 Budget for Greater London Authority and Functional Bodies
Preparation of Draft Component Budget

1. The purpose of this letter is to seek any comments that your Authority would wish to make before I prepare the draft component budget in accordance with the provisions of schedule 6 of the Greater London Authority Act 1999.

Present intention

2. In line with my budget guidance issued at the end of May budget you have provided a budget submission based on a budget requirement of £2,525.1m (including £39.4m for Step Change). However, I need to have regard to the implications for the overall consolidated budget requirement and the GLA council tax precept and take into consideration the government’s announcements on 2 December concerning capping. I am therefore proposing to prepare a draft component budget for the Police Authority for consultation of no more than £2,494.3m.

3. In the absence of any other options which might be proposed by your Authority instead, it is considered that this reduction could be achieved by:

Further savings which have since been identified: -£20.0m
Olympic planning team to be funded from the Olympic support budget (funded by council tax and lottery) in the event the 2012 Olympic bid is successful: £0.8m
Further savings/use of reserves to be identified: -£10m

4. I would also like advice on whether any increases in specific grants can be used to defray any existing increased costs. If this were possible then it might enable me to propose a draft component budget which would be less than 6% higher than that for 2004-05 and require an increase in the amount of council tax income raised for the Police Authority of also less than 6%.

5. On the basis of my current intentions and delivery of the reductions identified above, the budget would still provide resources to maintain the current level of activity and would provide £39.4m to continue the roll-out of the safer neighbourhoods programme and supporting growth in specialist units. This would allow a further five dedicated neighbourhood teams to be in place in each London borough throughout 2005-06.

Equalities

6. The extent that the budget is expected to deliver improvements in the recruitment and retention of women and black and ethnic minority officers is being covered during the current round of budget and equalities meetings. The Authority must continue to prioritise equalities so that substantial progress is made in the recruitment and career development of women and black and minority ethnic employees.

Timing

7. Despite the delay in the Government announcing its local government grant settlement, it is my intention to prepare all draft component budgets by 13 December in order that wider consultation can begin as planned. It is appreciated that the MPA may wish to provide comments after that date and if necessary I will review my budget proposals and advise budget consultees of any material development.

8. Any further comments from your Authority should be sent to Martin Clarke, Head of Strategic Finance, Finance and Performance Directorate, 3rd Floor, City Hall, London SE1 2AA (fax 020 7983 4241 or email martin.clarke@london.gov.uk).

Yours sincerely

Ken Livingstone
Mayor of London

Copies to: GLA Executive Director of Finance and Performance
MPA Clerk to the Authority and Treasurer
MPS Commissioner and Director of Resources