A death knell for revenue loans to schools?
A month ago we looked at the issue of schools in deficit, assessing the level of interest in this topic from key stakeholders in the education system. It is clear that more schools are finding it difficult to balance their budgets, due to funding being insufficient to cover cost pressures. Yet we found that oversight by LAs and the EFA is not what it should be, and Ofsted in particular is neither interested in school financial leadership nor capable of accurately assessing a school’s financial sustainability. If you missed this post, check it out at https://schoolfinancialsuccess.com/schools-in-deficit-who-cares/.
Since then, there has been an interesting development: on 24th March DfE published a rather hasty consultation on changing the criteria used by local authorities (LAs) to award loans to schools. This would normally be one option to help schools avoid a deficit by funding non-routine expenditure such as restructuring costs or invest to save schemes that will address reduced funding over a multi-year period.
The closing date for responses to the consultation is 21st April, leaving virtually no time for Schools Forums and individual schools to submit their views, on account of the timing of the Easter holidays. So much for the standard of a 12-week consultation period. You can find the consultation here:
Given that most local authorities will already have published their 2017/18 Schemes for Financing Schools, which cover such arrangements, the timing is strange and could be said to smack of desperation on DfE’s part.
So what’s it all about? We explain below, starting with the current position for schools that might be in financial difficulties.
Schools and academies are not permitted to borrow from external organisations such as banks unless specific permission is obtained from the Secretary of State. It is therefore up to local authorities (LAs) and the Education & Skills Funding Agency (ESFA) to respond to any financial difficulties that are experienced.
LA maintained schools that can’t achieve a balanced budget have to apply to their LA for a Licensed Deficit. This does not attract any extra funding; it is simply permission to set a deficit budget (which would otherwise be illegal) until it can be brought into balance. The school has to develop and implement a recovery plan within the conditions set out by the LA in the local Scheme for Financing Schools. Conditions will usually include a maximum period for the Licensed Deficit (no more than three years) and regular monitoring meetings to make sure the school achieves the recovery plan.
When an academy is unable to set a balanced budget, ESFA must be notified within 14 days of the proposal to set a deficit budget. If this happens, it is common for ESFA to issue a Financial Notice to Improve because of the requirement to advance funds to bring the academy’s budget into balance. This will also involve a recovery plan. Academies can also make a request for an advance for a cash flow problem, which can arise even when they are not in deficit. This would normally be recovered within 12 months.
A Freedom of Information request made by Schools Week in 2014 found that 22 academies were handed £12.6 million in emergency funding between 2011/12 and 2014/15. Of this sum, only £331,000 had to be repaid. In evidence given to the Public Accounts Committee on financial sustainability of schools on 23rd January 2017, Peter Lauener, Chief Executive of the Education Funding Agency assured MPs that while 100% of the funds provided to academies in deficit in 2011/12 were written off, in 2015/16 85% of them were repayable. The early cases were therefore treated very differently from LA maintained schools where formal repayment arrangements apply to loans awarded, but as far as we can tell, the playing field is more level now.
For LA maintained schools, LAs can operate loans schemes to schools, but these are not supposed to replace a licensed deficit arrangement. The Schools Forum must be consulted on the introduction of a loans scheme or any changes to it. Loans schemes are part of the local LA’s Scheme for Financing Schools, which governs the financial relationship between an LA and its schools in much the same way as an academy’s funding agreement with the EFA.
The finance regulations for school funding make no mention of loans to schools, only prudential borrowing by the LA to modernise the school estate. It is only in the DfE’s model Scheme for Financing Schools that we find any reference to loans for schools:
‘It is open to an authority to include in its scheme a form of loan arrangement for schools which does not operate by way of a licensed deficit but rather by way of actual payments to schools or expenditure by the authority in respect of a particular school on condition that a corresponding sum is repaid from the budget share.’
It is worth noting that this current wording does not specify the circumstances or criteria under which LAs can award loans.
The links between loans schemes and deficits
The question of whether a school is in deficit has become more prominent with the increase in academy conversions, since DfE had to decide what happened to balances in different situations. The treatment of surpluses is outlined in The Academy Conversions (Transfer of School Surpluses) Regulations 2013. These can be found at http://dera.ioe.ac.uk/19000/1/9780111106693.pdf.
Because the regulations do not cover deficits, we have to rely on statutory guidance. This has the snappy title ‘Treatment of surplus and deficit balances when maintained schools become academies’ and can be found at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/416430/School_balances_on_conversion_submission.pdf.
The combination of the regulations and statutory guidance means that schools that convert voluntarily to academy status always take their balances with them, whether they are in surplus or deficit. This is true even if they join a sponsored MAT. The key defining criteria are that they are successful schools and change status voluntarily.
However, there are different arrangements for schools that are subject to intervention, for example when an Academy Order is issued following an Inadequate Ofsted judgement. If they have a deficit, this stays with the LA, and the sponsored academy starts with a clean sheet.
In some cases, schools subject to intervention and issued with an Academy Order can keep a surplus. Even where it would normally revert to the LA (e.g. when the school is closed under statutory processes, or where the Secretary of State issues the Academy Order following intervention), the guidance states that the surplus can be transferred to the Trust, and that some LAs have agreed to this.
The different treatment of surpluses and deficits seems out of line with other aspects of the legal position for a sponsored academy, where it is treated as a new school – for example in terms of performance and Ofsted inspection. One would expect that if deficits remain with the LA, then so should surpluses.
When an LA has to write off a deficit, it must be funded from the LA’s own resources. It can only be set against the Dedicated Schools Grant if the Schools Forum has agreed to set aside a contingency for this. It is a significant risk that LAs are very concerned about, since the deficit will have arisen as a result of school decisions under delegated responsibility, and it is extremely difficult to stop a school overspending in the period before joining a MAT. LAs simply do not get information in real time.
DfE’s view is that it is the LA’s fault when a school goes into deficit, since it has powers to withdraw delegation (as ESFA has for academies). However, in practice this is regarded by LAs as a last resort; it allows schools to evade their responsibilities instead of sorting out the problems they have created. The school would also be likely to blame the LA if the decisions taken to cut back spending had an adverse impact on standards.
Successive funding cuts have also impacted on support services in LAs to such an extent that they have very little capacity to watch school budgets closely, in order to identify proactively when schools might fall into deficit, let alone take over decision making on the school’s spending on a day to day basis when delegation is withdrawn. EFA was criticised by the National Audit Office and the Public Accounts Committee recently for failing to have robust oversight of academies, so it appears to be a systemic issue across all types of school.
The consultation on changing criteria for loans schemes
If an LA maintained school that becomes an academy has a loan from the LA, the academy has to take on the liability for repaying the loan. This applies regardless of what type of academy it is.
It seems that this has led DfE to conclude that some LAs are introducing loans schemes as a way round the requirement that deficits of schools which become sponsored academies revert to the local authority, rather than as a supportive response to fears about future funding and the impact of the National Funding Formula. LAs do have to minimise the risk (which many already do via agreement from Schools Forums to create a contingency) and it is a most unfair situation for them to be landed with a deficit that is not of their making, but it is also a priority for them to prevent their maintained schools from ending up with an uncontrollable financial disaster that impacts on standards.
The Department has now issued an urgent consultation which outlines a proposed directed revision to LA Schemes for Financing Schools (i.e. forcing LAs to alter the wording in their local Scheme) as follows:
‘Loans will only be used to assist schools in spreading the cost over more than one year of large one-off individual items of capital expenditure. Loans will not be used as a means of funding a deficit that has arisen because a school’s recurrent costs exceed its current income.’
DfE claims that ‘the original purpose of the internal loan scheme provision was to enable schools to spread the cost of large one-off items of expenditure, particularly capital items, over more than one year to make these more affordable’. As we have already noted, the wording in the existing DfE model Scheme does not make this clear, since it does not mention capital at all, or specify what type of expenditure the loans can cover.
Not all authorities currently have loans schemes, but a quick sample of around fifteen of those that do shows a range of purposes. These include:
- The school’s inability to achieve improvement targets without additional funding in that year;
- Difficulty in meeting savings targets required due to falling rolls;
- Invest to save schemes such as energy efficiency measures;
- Major capital projects;
- ICT and other equipment;
- Revenue loans (unspecified purpose);
- Fulfilment of maintenance responsibilities;
While one or two do seem to use loans to cover deficits, the majority in the random sample do not.
The consultation includes a second proposal, relating to the current expectation that an academy will continue to repay loans made by the LA to the predecessor school under an internal scheme. The current rules state that the DfE will not recognise a loan if it has been agreed after the governing body or IEB applies to become an academy or after the school becomes eligible for intervention by the Secretary of State. This seems fair.
However, an extra paragraph is now proposed in the statutory guidance on treatment of surplus and deficit balances when maintained schools become academies, to say that ‘The Department will not recognise as a loan any sum that has been provided in order to fund a deficit that has arisen because a school’s recurrent costs exceed its current income’.
Thoughts on the proposals
While DfE is presenting the current situation as a measure to stop LAs avoiding having to write off deficits, it is rather more complex than that, and the proposals could have a detrimental effect on schools.
There have been some indications that it is becoming increasingly difficult to find sponsors for schools in deficit. This is not surprising, given the overall concern about the impact of the National Funding Formula redistribution and the inadequacy of the total funding allocated to schools up to 2020 when set against cost pressures.
Surely it would be better for a school to have a loan, involving a robust assessment of their ability to repay it, rather than a deficit? A prospective sponsor would be able to see a clear plan for repayments and a phasing of budgetary reductions to fund them. This might minimise the risk of compulsory redundancies, a financial and personal cost that is surely wasteful.
Alarm bells rang recently when it was reported that Norfolk County Council had been put under pressure from their Regional Schools Commissioner to remove their Licensed Deficit facility for the very reason that it was proving difficult to find academy sponsors. The Council did in fact agree to remove the Licensed Deficit scheme; further details can be found at https://csapps.norfolk.gov.uk/csshared/ecourier2/misheet.asp?misheetid=22719.
It is not at all clear how this will work. Without a Licensed Deficit, a school would have to bring the budget back into balance within the year, or else it would be forced to set an illegal budget. Banning loans for revenue purposes makes the situation even worse.
If a school cannot get a revenue loan from the LA, for example to fund one-off revenue costs of restructuring or renegotiating/buying out expensive contracts, then it will have to make immediate and more significant cuts. This could increase the number of redundancies, because the cuts may need to be greater than if they were phased over more than one year. Consultation and notice periods mean a full year’s savings cannot be achieved immediately.
So it is not clear why DfE believe that withdrawing the ability to make loans will magically enable schools to balance their budgets, especially if pressure is put on more LAs to remove Licensed Deficits. DfE and RSCs really need to get their act together on this.
The obvious risk is that schools will devise a budget that looks as if it is balanced, but by the end of the year they will show a deficit. Any due diligence exercise during the academisation process will spot the problems, so it will not resolve the issue of delays in finding sponsors.
It feels as if DfE’s obsession with ensuring that LAs have to write off deficits for sponsored academies is causing a blind spot in common sense approaches to support schools. Many LAs have secured Schools Forum approval for a contingency to cover deficits arising from school closures and sponsored academies, so it is clear that schools are being reasonable about this, and are willing to spread the risk in a collegiate approach.
Please consider responding to the consultation before it closes on 21st April. Let’s show DfE that the most important thing is giving schools a breathing space to manage cost pressures and potential funding reductions. In the long run this will reduce the risk of compulsory redundancies and spread the impact across several years. We still don’t know what the National Funding Formula decisions will bring, so schools and LAs need maximum flexibility, not a strait jacket.