A rollover - not a jackpot

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MST’s no-nonsense series on school finance continues as Malcolm Trobe gets to grips with reserves, balances, rollovers and the funding of sixth forms.

In the first article of this series I looked at the concept of ‘best value’ and how schools can make good use of consistent financial reporting (CFR). In this edition, in preparation for examining how financial planning can be linked with strategic and longer-term planning, I will examine the issue of reserves, balances and rollovers, as well as looking at the current issues concerning the funding of sixth forms.

The introduction of local management meant that individual schools were required to close their accounts at the end of each financial year. Any surplus (or deficit) at the end of the financial year was termed a ‘rollover’ and transferred into the following financial year. Over several years there has been regular criticism that the level of rollovers (often incorrectly termed ‘balances’) has been too high. This criticism has, in general, been based on raw data only and often showed a lack of understanding of the school budget process and what was included in the total rollover.

There are two main ways of accounting used in schools. Accrual accounting was introduced in schools that were grant-maintained, and has been adopted by a number of local authorities. This takes into account the committed expenditure from the financial year and gives an accurate picture of the end-of-year balance. However, some local authorities still use an actual expenditure method, which does not take into account committed expenditure, these costs appearing the following financial year. This gives a false, and usually inflated, view of the true end of year financial situation. There can be many reasons for this, including late invoicing, orders made but not received, and late claims from March.

Although the annual budgets – supplied through the local authority and grants such as Standards Fund and Standards Grant – are essentially revenue budgets and meant to be spent on students attending the school in that year, longer-term planning does need to be taken into account. This is particularly relevant in schools with falling rolls, as funding will be required to pay for the higher level of staffing in the first five months of the financial year before reductions in staffing are made for the smaller number of students. Standards Funds, including Formula Capital Grant, can be held over into the following financial year and this can inflate the end-of-year balance. It is therefore good practice that these end-of-year balance figures are reported separately. Schools should be open about the breakdown of any rollover, giving reasons for the planned hold-over to the following financial year.

Given all the above factors and the differences in individual school financial and organisational situations, it is wrong for the press or politicians, either at national or local level, to run sensationalist headlines about the level of what they term ‘school balances’. Comments that schools are well funded, based on simple raw data about the level of rollovers, are founded on a lack of understanding of the system and have a weak evidence base. Nevertheless, some schools hold balances that would, under all normal criteria, be deemed excessive. School leaders and governors should be aware that politically, the current overall level of school balances considerably weakens the case for an increase in funding to schools.

Reserves & contingencies

There has never been a nationally agreed level that a school needs to hold back, unallocated for any specific expenditure, either as a percentage of the annual revenue budget or as a sum based on the size and phase of the school. Several years ago Ofsted indicated a figure of between 3 and 5 per cent as a sensible ‘unallocated reserve’ and this range has also been considered reasonable by the Audit Commission. The Government has given local authorities the power to ‘recover’ reserves of over 5 per cent from schools in cases where the school has no valid reason for holding such a high reserve. In 2007 the Government consulted on further legislation to recover part (5 per cent) of every school ‘annual rollover’ but after considerable pressure this proposal was withdrawn. At the time, however, the Government emphasised the need for schools to reduce the overall level of their ‘balances’. Schools have many years’ experience of setting school budgets and it is widely accepted that schools need to hold unallocated funds for a range of reasons, the most common of which are:

  • a contingency fund to deal with minor adjustments to expenditure from a range of budget headings, e.g. increase in advertising budget, underestimate of examination fees.
  • a reserve fund to deal with one or more major expenditures that could not have been accurately forecast, e.g. the need for agency staff to cover an unexpectedly high rate of long term absence, replacement capital equipment such as a boiler not covered through insurance.
  • as part of the reserve a planned build-up of funds to pay for some major work or project, e.g. ICT expenditure. It is anticipated that most major building work will either be funded from Formula Capital (Standards Fund), from local authority capital funds or, in secondary schools the Building Schools for the Future (BSF) project, although it may be necessary to ‘top up’ funding from the annual delegated budget and this needs to be part of the strategic financial planning process.
  • holding funds over to the following year as part of the reserve to cope with adjustments to the level of funding to the school to balance out variations in funding levels, e.g. dealing with a retaining a higher staffing level through until September, managing the 5/12:7/12 funding split across academic years.

Schools should avoid building a series of small contingencies into each budget heading. It is better practice to forecast individual budgets as accurately as possible and hold an overall contingency. Between 0.5 and 1.0 per cent of the annual delegated budget to cover for contingencies is probably the right level.

I would suggest that schools aspire to hold a further 1.0 to 2.0 per cent of the delegated budget as a genuine reserve fund. Small schools may require a higher percentage and large schools a lower percentage. It is unlikely that any school, except the very largest, will need a reserve in excess of £85,000 and all but the very smallest primary school will need a reserve of at least £20,000. Schools may therefore wish to set themselves a ‘cash sum reserve’ rather than a percentage of the delegated budget. A school may need to build up to the desired reserve over a period of years. Once accumulated, this reserve will only need to be ‘topped up’ on an annual basis if the reserve has been called upon in the previous financial year.

When a school experiences a major drain on its reserve, it may take some years to build up the reserves to the required level again. It is accepted good practice that schools have a clear policy on their level of reserves. This can be added as a short section to the scheme of delegation. The school’s principles for holding reserves should be shared with the local authority. Schools should also be very open to all parties about the breakdown of any rollover, giving reasons for the planned hold-over to the following financial year.

Sixth form funding

A number of schools with sixth forms have voiced concern over the way they were treated in the funding for the September 2008 sixth form intake. Several schools submitted plans, backed by evidence, indicating they would have an increase in sixth form numbers for 2008. However, many of these schools have found themselves with a shortfall, having been funded on the consolidated number for 2007. The major reason was that the Government had underestimated how many students would be in school sixth forms in September 2007 (by more than 4,000) and subsequently set too low a prediction, and hence budget, for the 2008–09 year. It is clear that the communication from the LSC in many parts was not good and that the opportunity to discuss plans did not occur in many cases.

The situation was not helped by the fact that, nationally, school sixth forms considerably overestimated the numbers they were planning for in September 2008. Overall the plans submitted indicated an increase of 28,000 sixth form students, which is well above all national forecasts. Indeed. in some areas the submitted plans came to a total that exceeded the number of students in Year 11!

The key question is: how will this be avoided for 2009? Last year in many parts of the country the 14–19 area planning and, hence, the 16–19 aspects were not strong. A clear local plan, including projected numbers for school sixth forms and college places, will be a good starting point. If this plan can be agreed by all local institutions in their partnerships, they will avoid the danger of over-egging the pudding, and there will be a sound basis for a debate with the local authority and the local LSC working in tandem.

All schools will need accurate data based on their progression and completion rates over the last few years as evidence to support the local plan. It is hoped that schools will share their data including the accuracy of their 2008 plans as part of the planning process. There should also be a robust debate to agree the plan, including 16–19 numbers in every institution. The schools and colleges will then have completed their part.

It is also crucial that the Government accurately predicts the numbers going into schools and colleges post-16. The government funding system will need to be more flexible than it is currently. It is no good having more money in the apprenticeships budget than there are apprenticeships to fund while having what can be called ‘unfunded learners’ in the school and college system.
This flexibility is something the Government will need to get right as, by 2013, all 17-year-olds will be in education or training and the funding will need to be in the right place for each and every one of them. There can be no ‘unfunded learners’ then.

Malcolm Trobe is headteacher at Malmesbury School, Wiltshire and was president of the Association of School and College Leaders for 2006–07. In the next of this series of articles he will examine linking financial planning with strategic and longer-term planning.

Taken from Managing Schools Today Issue 17.6