How did the crisis happen?: THE Audit Commission was called in by the Police Authority to carry out an independent review of the circumstances surrounding the budget deficit for 2004/05.

The extent of the problem was identified in late January this year following a meeting of the Police Executive team and Cleveland Constabulary's director of finance and commissioning, Steve Preval.

As part of a strategy to take the fight against crime to the criminals, the Police Authority had hoped to boost staffing.

It approved an additional £5.2m to meet the cost of 100 new police officers and 100 community support officers.

These plans were spectacularly derailed in January this year when Chief Constable Sean Price told Police Authority chairman Ken Walker he had discovered a £7.3m "black hole" in the force budget.

Taxpayers on Teesside were already paying a hefty amount for their police force.

The part of the council tax bill for policing had risen by 45 per cent in 2002/03 and 26 per cent last year.

In the three years leading up to March this year, the annual funding available to the force increased by more than £16m to £109m.

When the budget imbalance was revealed, the recruitment plans were put on hold and Mr Preval was suspended by Deputy Chief Constable Ron Hogg pending an investigation.

The Audit Commission report appears to vindicate Mr Preval's position that he had repeatedly warned of the impending financial catastrophe.

He warned the Police Authority in 1999 that the budget for 2004/05 would be a "difficult year".

The commission said the problems were highlighted in external audit reports over recent years, when the authority was criticised for its governance and financial management.

In particular, the Audit Commission's annual letters to police authorities across the country highlighted the need to review the level and use of balances and recommended the development of a longer-term financial strategy.

Cleveland's embattled Chief Constable, Barry Shaw, who oversaw the force as it appeared to blunder from one crisis to another, retired in March last year. He was succeeded by Sean Price.

The report said the new regime recognised the need to improve financial management, but Mr Price said he was unaware of the scale of the problem until January this year.

Day-to-day financial management of the force is delegated to the Chief Constable and is undertaken by the director of finance.

The Police Authority relies almost entirely on information supplied from the finance department.

However, the ongoing monitoring of spending against the budget and overall financial management remain the responsibility of the authority.

What went wrong?

THE warning signs for the deficit were originally raised in 1999.

The authority's director of finance, Steve Preval, gave a presentation to members of the police authority, warning them that 2004/05 would be a difficult year, saying there would be "inadequate resources to stand still".

Budget documents handed to the Audit Commission estimated a deficit ranging from £4.8m to £7.8m. Eventually, everyone settled on a figure of £7.3m.

The report said £2m was the result of ongoing financial pressures common to most police forces. A further £1m related to growth in spending.

The remaining £4.3m was the result of weaknesses in financial management.

Some other key problems included:

* Significant weaknesses arose in 2004/05 following the introduction of the Change Programme.

* There was a lack of a coherent strategy for allocating police budgets between the four districts, which was said to be potentially confusing.

* Arbitrary targets had been set for police numbers without any indication of how they had been set or to see whether they had any effect on crime levels.

* The level of overtime pay equivalent to £1,700 a year per officer appeared unusually high. The report said: "Overtime appears to have become institutionalised."

* Of the 113 employees who use special financial allowances, only 13 met the criteria needed to receive it.

* A programme to provide a computer for every officer went ahead without regard to on-going maintenance costs.

* Monthly performance review meetings became more infrequent last year. The Audit Commission could not find minutes from ANY meetings held during 2003/2004.

* Mr Preval was not notified about the approval, by individual members of the police's executive team, of 61 civilian posts. Therefore no funding for the posts, which would have cost £1.5m a year, had been identified in the 2004/05 budget.

It said the financial pressures should have been picked up by the force finance team, but a lack of control and strong leadership failed to account for the problem.

Some police authorities started to build up significant financial reserves to combat the coming additional drains on resources. Cleveland seemed to adopt a different strategy and, at one time, resources had fallen to only £200,000.

In 2001/02, the force received a £1.9m windfall from the Government. The director of fianance urged executives to use £1.4m to replenish reserves. Instead the money was used to fund a force "wish-list" for equipment.

Current reserves stand at £1.6m. The report said they should be nearly £5m.

As a result, the hard-pressed taxpayers of Teesside will have to fund a further 13.8 per cent budget increase to boost the balances.

The report is highly critical of the financial management and governance of the Police Authority.

However, despite the problems, it said the budget gap was not the result of any misappropriation of money or a major breakdown of systems.

What is the position now?

DESPITE an anticipated budget black-hole of £7.3m for 2004/05, the authority is expected to have an underspend of between £500,000 and £800,000 from last year's budget.

Although these figures account for only 0.5 per cent of its annual spend, the majority of the money was only saved in the final quarter after the crisis was discovered.

The underspend in the third quarter was projected to be about £250,000, but since then, there has been limitations imposed on overtime, training and expenditure on equipment and furniture to make more savings.

Budget savings of £750,000 had been anticipated from the force's Change Programme, which was set in motion by former Chief Constable Barry Shaw in early 2002.

However, early indications showed the savings were unlikely to materialise because they were not fully costed, planned or monitored.

The programme aimed to combat rising crime figures by changing working practices and updating computer systems while improving overall performance following a stark warning from Her Majesty's Inspector of Constabulary (HMIC).

More communications staff were introduced, more police officers were planned and the number of officers dealing with drugs and organised crime was increased.

The scheme was hailed as the way forward by the force.

However, HMIC inspector Ken Williams said the programme was massively ambitious, in a report published late last year.

It said the initiative had been rushed, with some aspects not fully thought through.

The report warned: "Her Majesty's Inspector will closely monitor progress of the Change Programme as it unfolds and, much more importantly, force performance.

"He expects to see sustained improvement over the coming months and will intervene if this is not delivered."

Last year, within months of taking over the force, Chief Constable Sean Price recognised the operational changes were not working and, in October, reversed many of the changes.

In its report into the authority's difficulties, the Audit Commission has recommended that all significant changes in service delivery must be fully costed and any savings or other changes in budget should be validated.

What is being done?

ONCE the dust had settled on the discovery of the financial crisis, a recovery plan was put into action.

The £7.3m revival plan has been examined in close detail by the Audit Commission and has been broken down into three categories.

According to the report, £5.3m of the savings are likely to be achieved, £2.2m will probably be achieved and £300,000 are unlikely to be achieved.

However, £3m of the savings would result from one-off measures and further savings will be required in 2005/06.

The one-off savings will mainly come from a £1.4m reduction in pension provision, which the report said would be difficult to achieve.

Overtime levels are also due to be cut by almost half and 61 vacant posts will not be filled yet.

Worryingly, the report also flags up £6m of spending currently supported by grants that are due to end in the next five years.