At the cliff edge
By now, you will probably be in the middle of some in-depth work to identify whether you can balance your school’s 2018/19 budget. It’s a tense time, as your decisions will have an impact on many people. It’s bound to feel like standing at the edge of a cliff looking down into the abyss.
We’ve covered the National Funding Formula (NFF) in previous posts, so we won’t go into too much detail here about the whys and wherefores of the changes – your funding for 2018/19 is what it is, and you have to make the best of it. This post focuses on the importance of putting it into context, in terms of your medium-term financial plan.
In summary, the key influencing factors on your per-pupil funding levels are the impact of the NFF on the grant your local authority (LA) receives, and the decisions that officers and political leaders have taken on how to distribute it between schools. Changes in pupil numbers and characteristics between October 2016 and 2017 may also have played a part in your funding outcomes. Even with improved per-pupil funding, falling rolls could cause a cash reduction. Alternatively, a small gain in per-pupil funding could be amplified in cash terms if rolls are rising.
The gap between funding and cost pressures could also mean you struggle to set a budget. Since most of the pressures relate to employment costs, schools most likely to suffer are those with minimal per-pupil funding increases and a pay budget that forms a relatively high proportion of total spending.
The Education Policy Institute (EPI) has recently published a report, ‘School Funding Pressures in England’, at https://epi.org.uk/publications-and-research/school-funding-pressures/. It predicts that around 40% of schools in 2018/19, and almost half in 2019/20, are unlikely to receive sufficient funding to cover a basic 1% pay award.
If you have a major problem on your hands, and need to undertake a fundamental budget review, help is at hand with our latest book in the School Financial Success series, ‘Leading a School Budget Review’. It shows you how to use change management techniques and how to plan and deliver a review in a way that minimises the impact on outcomes for your pupils. We provide templates with worked examples to help you review a wide range of budget headings. Visit our Books page for an e-book version, or Amazon (http://amzn.to/2oSd79P) for Kindle and print copies.
Strategic financial planning
Your focus at the moment is bound to be next year’s budget, and your SLT and governors will be waiting eagerly to find out what sort of financial position the school is in. But don’t lose sight of the strategic context: your medium-term budget plan.
The first book in our new series, ‘School Budget Mastery’ (also available on our website and at Amazon), highlights the importance of strategic financial planning as an element of financial leadership. We discuss the importance of organising the use of your resources across a multi-year period, always making sure you have enough money, and that you spend it well:
‘What does spending it well mean? Essentially, it means that you are targeting the resources you have to the school’s priorities, i.e. the things that are important to you, your staff and above all your pupils. What is important should always be the things that work best to achieve your aims. Financial decisions need to be rooted in evidence as to which strategies have the biggest impact on outcomes.
This doesn’t mean planning a precise budget for a five-year period. The best you could say is that any attempt to do this will be wrong. But you should have a sense of the overall shape of what resources might be available, and how they will be spent. After all, your high-level strategic priorities are unlikely to change fundamentally – it’s only the detail that might change, for example in response to national decisions on performance measures or local circumstances.’
But wait, we hear you say. How can I do multi-year budget planning when I don’t have multi-year funding allocations? You’re right; this is the missing piece of the jigsaw. The trouble is, we are now at a staging-post on the way to direct funding by DfE, and there are many unknowns beyond 2018/19.
First, let’s take a look at what we know about 2019/20:
- For LA allocations, the national unit values for each of the NFF factors will stay at the 2018/19 levels, but the data used to work out the primary and secondary units of funding (with the endearing acronyms of PUF and SUF) will be updated to October 2017.
- The PUF and SUF values will be multiplied by October 2018 census data. Non-NFF items will then be added on as lump sums (although some of them might be worked into the NFF) to produce the actual 2019/20 LA Schools Block allocations before transition.
- The baseline for transitional protection and capping in 2019/20 won’t be what each school actually received from its LA in 2018/19. The starting point is what the DfE’s pure NFF would have provided.
- The minimum per pupil increase in the LA grant for 2019/20 for each school will be another 0.5% (cumulative 1% since 2017/18) and the ceiling on gains will be lifted by another 3% per pupil.
- LAs will again run a local formula and can decide whether to replicate the NFF values or not. They can also continue to set their own minimum and maximum changes (i.e. protection and capping), as they did this year. Decisions will depend on what’s affordable locally.
- Your school’s funding will be calculated using October 2018 census data.
There’s a bit of uncertainty there, but more importantly, what don’t we know about 2019/20?
- We don’t know what will happen to the non-NFF items such as rates, PFI and pupil number growth, which DfE are trying to change to a formulaic basis instead of the current historic spend approach. For some of these, finding a fair solution could be incredibly difficult. Some LAs may have to take money from elsewhere in the local formula to cover any cost pressures.
- It’s not yet clear whether transfers from the Schools Block into the High Needs Block will be allowed in 2019/20. If not, some LAs could face a serious shortfall. There could be an adverse impact on schools, depending on how this is addressed locally.
- Your rolls could change in October 2018, along with pupil characteristics. A positive change of x% in your school may not mean the same percentage change in funding. If there is a big increase in data, the LA might not be able to keep a factor value the same. If the pot size has to be fixed, your share of it could fluctuate because of other schools’ figures.
For 2020/21, the situation is even less clear. This is the start of a new Spending Review period, when the Treasury decides how much to give each government department. DfE doesn’t know how much it will receive or how much it can allocate to the Schools Block and other blocks within the Dedicated Schools Grant. Ministers can’t promise anything – hence the cliff edge.
We also don’t know when the ‘Hard NFF’, i.e. direct funding by DfE, will happen. There was no legislation in the 2017 Queen’s Speech (which covered two years) to permit this change. So there could still be a local funding formula in 2020/21 and even beyond. We simply don’t know.
The EPI report provides some stark figures about the trend in school deficits, indicating that many schools have not acted early enough to address unfunded cost pressures. This might be due to the lack of information to predict future funding.
In the current climate, that’s not a good strategy. Would you set off on a driving holiday without researching the route? Maybe you would if you intend booking B&Bs as you go. But that’s a personal decision which is unlikely to affect anyone else. A school budget, on the other hand, is public money and your decisions affect a lot of people.
The danger is that an inability to balance the 2018/19 budget might cause a knee-jerk reaction to start cutting staff. After all, you’ve probably snipped away at just about everything else you can think of. Your governors will probably be averse to redundancies, and you will see unrest among staff and attention from unions, who will understandably want to know whether this is absolutely necessary.
To substantiate decisions like this, you need a clear strategy that anticipates future developments, such as a potential need to expand to meet local demand, or changes in the curriculum and/or organisation of the school. This might reveal that the current situation is a short-term blip. Cutting staff could be costly (in terms of time, redundancy costs and low morale) and an unnecessary exercise if more staff are needed later on.
While it’s illegal to set a deficit budget, maintained schools can apply to their LA for a licensed deficit. This requires a recovery plan, usually over a period of three years. If you are in a MAT, the Trust will be expected to cover it within their overall funding and will oversee your recovery plan to restore the balance at a later stage. Stand-alone academies can ask ESFA for a loan.
This can provide a breathing space to prepare a master financial sustainability plan, as a way of controlling the things you can control amid all the uncertainty. Such a plan is based on a range of scenarios for your future funding and spending, setting the context for your decisions in the short term.
A broad-brush model using high-level assumptions about funding is good enough to stimulate a strategic debate on how the school would react in different scenarios. It is certainly better than burying your head in the sand. Have your senior leadership team and Governing Board considered how you would respond to a bleak funding settlement over the next two to three years?
Forecasting your school’s funding
Forecasting funding is a key requirement for a multi-year budget plan. Our recommended method is to construct best, middle and worst-case scenarios. This will allow you to develop budgetary solutions for a range of different potential funding levels in the next three years, as part of your normal medium-term planning.
By taking this approach, you’ll effectively have a set of plans on the shelf to choose from. You can select the most relevant one and tweak it as further information becomes available. You can also make the most of opportunities such as staff turnover and contracts expiring, taking better decisions that are consistent with your longer-term plan and which will support the achievement of it.
The two key elements of your funding are firstly the amount of per-pupil funding you receive, and secondly how many pupils you have. It sounds pretty simple, doesn’t it? Having read this far, you will understand there are uncertainties, but you can construct your own forecasts as long as you develop and state your assumptions.
In relation to per-pupil funding, you need to start with the 2018/19 budget and estimate how this might change over the next three years. What assumptions can you make about the changes? It depends whether you have gained or lost from the NFF, and in the short-term what your LA has decided to do in the local funding formula. There will be some adjustments needed because not all of your funding is pupil-led – some elements are school-led, such as lump sums.
It’s your choice as to the assumptions you make about your best, middle and worst case per-pupil funding levels and how they will vary across the three-year period. As long the assumptions are reasonable, not overly optimistic, and you state them clearly, they can form the basis for a high-quality discussion about how they will influence your future funding levels.
Then you need to consider your changes in pupil numbers, again constructing best, middle and worst-case scenarios over the next three years. Your LA will have a pupil forecasting model, but it can be difficult to be precise for individual schools. This is where your local knowledge comes in. Use it to estimate the impact of all the different influencing factors that might affect your future rolls.
By combining each of the per-pupil funding level scenarios with those for pupil numbers, you will have nine possible options. You can then select from these the three you want to develop further: best, middle and worst cases, using your confidence level in either £ per pupil or roll options.
Now you can feed these three sets of funding into your forward planning budget software and start to work out how you would find the necessary savings, or deploy any extra resource you are lucky enough to have. You can adapt this approach for all the other types of funding you receive as well.
We’ve made this sound simple, but you do need to be aware that there are many different elements to consider in this process, some of which are quite technical, in order to arrive at meaningful forecasts.
If this all sounds too daunting, don’t worry. We are rewriting our 2016 book and toolkit (Secure a Sustainable Budget), to produce a more up to date single book that takes you through each step so you can produce your own model. It will explain exactly how to calculate your per-pupil funding levels so that you don’t overstate the element that is influenced by changes in pupil numbers. We will lead you through the various aspects of the funding system, especially the arrangements for transition, that you need to take account of when identifying your best, middle and worst-case percentage changes in your per-pupil funding over the three-year period.
There are many issues to consider when forecasting pupil number changes, and we will show you how to draw the different strands together to produce the three different scenarios. We then guide you through combining the per-pupil funding and pupil number scenarios for your final choice of options, and will show you how to use the same approach for nursery, post-16, Pupil Premium and other funding sources. This will provide a comprehensive set of options to stimulate senior leader/governor strategic discussions.
By guiding you through the methodology to construct your estimates, the book will provide a flexible approach that you can adapt to match your own preferred style. It all culminates in a template for a Financial Sustainability Plan, which will be an invaluable document to prove you are on top of your school’s finances. The whole exercise will provide evidence of your financial leadership ability.
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We wish you well in your journey towards a sustainable budget – it’s a challenging task, but one that’s essential for the financial health of your school and that will support you to achieve positive outcomes for your pupils.