Schools in deficit – who cares?
Leadership is a key determining factor in a school’s success, but financial leadership is the key determining factor in a school’s survival. If a school goes into deficit under normal circumstances, it brings significant challenges. In the current climate of a proposed redistribution of funding through the National Funding Formula and real terms cuts for every school, a deficit is likely to represent an even greater threat to a school’s future viability.
In this post we take a look at why the issue of school deficits needs to be given much greater attention, and consider whether anyone cares enough about it.
This week sees the closing date for consultation responses to the National Funding Formula (NFF) proposals – Wednesday 22nd March. We have commented on the proposals in other blog posts recently, so please take a look and consider submitting a response.
The problem is not only the redistribution of existing funding; it is that the overall pot is not sufficient to meet cost pressures and rising rolls. Schools gaining from the redistribution will at least be able to cover some of these cost pressures.
But for schools that are losing funding, it will become incredibly difficult to find enough savings to balance the budget without posing a risk to the school’s performance. This all suggests there is a much bigger risk of more schools either going into deficit or seeing existing deficits increasing.
On 17th March the Education Policy Institute published a report based on a deep dive analysis of the indicative Schools NFF allocations. The report can be found at https://epi.org.uk/report/national-funding-formula/. The key findings are that:
- There are unlikely to be any schools in England which will avoid a real terms cut in per pupil funding by 2019-20, even in areas benefiting from the new formula;
- Indeed, up to half of primary schools and around half of secondary schools will be faced with significant real cuts in funding per pupil of between 6 and 11 per cent by 2019-20;
- This amounts to an average real terms loss of £74,000 per primary school and £291,000 per secondary school.
- This equates to, on average, the loss of almost 2 teachers per primary school and 6 teachers per secondary school.
As our ‘SEND Funding Alert’ post shows (February 19th, at https://schoolfinancialsuccess.com/send-funding-alert/), it’s not just the Schools NFF that poses a threat to mainstream schools. The High Needs NFF is not responsive enough to reflect rising needs. Those LAs losing from the formula will not face reductions (thanks to a funding floor) but they will see their current funding frozen. Those gaining will see the extra funding limited to 3% per year, at least until 2019/20.
Fear of tribunals means LAs will focus on children with the most complex needs. This could lead to a further funding squeeze on mainstream schools, who may be expected to absorb more of the costs of low to mid-level SEND or make a contribution to the shortfall in High Needs budgets.
We will have to wait until the summer to find out what the government plans once it has absorbed the reactions to the proposals from all interested parties. But schools need to start preparing now, otherwise there will not be sufficient time to respond to a new potentially lower level of funding.
How your school can respond to the challenges of a real terms cut depends on your starting point. Let’s take a look at the national picture on school balances. The National Audit Office report ‘Financial Sustainability in Schools’, available at https://www.nao.org.uk/report/financial-sustainability-in-schools/, examined trends in balances between 2010-11 and 2014-15, and found that:
- The proportion of maintained primary schools in deficit fell from 5.7% to 4.2%.
- Between 2011/12 and 2014/15, the proportion of primary single academy trusts in deficit decreased from 3.2% to 1.6% and, for those trusts, the average deficit fell in real terms from £58,000 to £48,000.
- The proportion of maintained secondary schools in deficit was 15.0% in 2014-15 and between 2010-11 and 2014-15 the average size of deficit for those schools in deficit increased in real terms from £246,000 to £326,000.
The following chart from the NAO report shows that while the proportion of primary maintained schools spending more than their income has reduced since 2012/13, it is still around a third and there is an alarming increase in the proportion of secondary maintained schools doing so, which reached 59.3% in 2014/15.
The 2015/16 data has now been published. It shows net balances at £2.1bn, a decrease of £31.3 million since 2014-15 (before inflation). The proportion of schools in deficit has stayed broadly the same, at 6%, but the average primary school deficit has increased from £35k to £37k (+6%) and the average secondary school deficit has increased from £326k to £373k (+14%).
This is all before new cost pressures which are estimated to total 8% between now and 2020. Real terms cuts on this scale have not been experienced by many existing heads, so they may not have the right tools with which to tackle them.
Analysis of the system’s expectations on preventing and addressing deficits
Given the challenges outlined above, schools need help to secure a sustainable budget, which is a pre-requisite for achieving continuous improvement. A deficit can represent a major distraction from education performance, which is hardly fair on the pupils currently in school. It is important that the system sets out clear expectations, standards on how to prevent schools falling into deficit.
Sometimes a school or academy simply does not have the capacity and capability to address its own financial problems, for various reasons. In this case the system needs to provide clear monitoring processes to pick up these cases and ensure support can be provided.
We have examined some of the places we would expect these features to be forthcoming, and have found them somewhat lacking.
National Standards for Excellence for Headteachers (2015)
Let’s first look at the National Standards that heads need to aspire to. These can be found at: https://www.gov.uk/government/publications/national-standards-of-excellence-for-headteachers. They refer only briefly to standards that contribute to the school’s financial stability:
- Work with political and financial astuteness
- Ensure that the school’s systems, organisation and processes are well considered, efficient and fit for purpose, upholding the principles of transparency, integrity and probity.
- Welcome strong governance and actively support the governing board to understand its role and deliver its functions effectively – in particular its functions to set school strategy and hold the headteacher to account for pupil, staff and financial performance.
- Exercise strategic, curriculum-led financial planning to ensure the equitable deployment of budgets and resources, in the best interests of pupils’ achievements and the school’s sustainability.
We would expect the standards to be much more proactive in relation to strategic financial planning and budget monitoring, to ensure schools can keep within the available resources. It is difficult to know whether your desired curriculum will be affordable, if you haven’t modelled some scenarios for the school’s future funding based on the new NFF per pupil values and estimated pupil number changes.
Do you have the skills to estimate whether the school will have sufficient funding to deliver the vision under the new system? Do you know what controls should be in place to avoid overspending, to prevent the school going into deficit? What if your school is already in deficit – do you have the skills to construct a workable recovery plan? More than ever before, these standards and expectations all need to be present, as we enter an extremely challenging phase for school funding.
Ofsted Inspection Handbook
Considering that financial viability can have a major impact on the school’s ability to achieve its vision, and that all schools are facing real terms cuts, one would expect Ofsted to take a much more proactive approach to financial leadership as part of its leadership and management judgement.
Yet the Ofsted Inspection Handbook includes only a few references that go to the heart of financial leadership. Apart from information on the relationship of performance management outcomes to salary progression, there is no requirement to provide information on the school’s financial position before the inspection. Do inspectors ask for this in your experience? If so, it is not often mentioned in reports.
The overarching criteria for leadership and management make no reference to the main school budget and how well strategic financial planning and monitoring is undertaken to ensure the school is financially sustainable. The main focus is on the school’s use of ‘additional funding’, specifically naming Pupil Premium and the primary PE and sport premium. These can be a very small proportion of a school’s total funding, depending on the level of deprivation.
Governance criteria have a slightly stronger emphasis on whole school financial management. They include governors understanding how the school makes decisions about teachers’ salary progression and performance, and ensuring the school’s finances are properly managed. The outstanding criteria mention governor challenge on effective deployment of staff and resources to secure excellent outcomes for pupils. The good criteria include governors holding school leaders stringently to account, ensuring that the skilful deployment of staff and resources delivers good or improving outcomes for pupils.
This section also focuses on evaluating the use of additional funding: Pupil Premium, Year 7 literacy and numeracy catch-up premium, primary PE and sport premium, and special educational needs funding.
The inclusion of SEN funding is interesting; this is a very complex area and one which will become increasingly challenging with the redistribution of High Needs funding. The DfE has recently required all LAs to undertake a strategic SEND review. The Handbook has a separate section on pupils with SEND, saying inspectors will examine the impact of funded support for them on removing any differences in progress and attainment.
Ofsted reports – comments on finances
The content of inspection reports for schools in deficit leaves something to be desired. In our opinion, if a school’s performance is built on unaffordable staffing and resourcing, then any positive judgement is built on shifting sands and is unlikely to be sustained. Surely this merits serious consideration in Ofsted inspection reports, especially with the light touch approach for outstanding schools?
A sample of reports for schools with deficits over £1m reveals infrequent references to financial performance. Occasionally there is a factual statement about a deficit, with no recognition of the potential future impact on the school’s performance if substantial cuts need to be made. At worst, there is a misrepresentation of the school’s financial position. Here are some examples from the group of reports that were examined.
- One school was judged as Requires Improvement in December 2013 when it had a deficit of £2.8m (54% of its budget). The inspectors referred to the challenges of the deficit budget, which led to a significant reduction in staffing. However, they stated that ‘The financial management of the school is now robust, and the budget has been brought back into balance from a very large deficit.’ What happened to its balances at March 2014? The deficit increased to £3.1m. Subsequent monitoring letters do not refer to it. In November 2014 the school was judged Inadequate. The legacy of the deficit was referred to, saying that the vision had not been implemented because of these constraints. By March 2016 the deficit had reached £3.5m.
- One school was judged outstanding with good Leadership & Management in May 2015, having had a deficit of £1.5m in March 2012 rising to £3.3m in March 2015. Ofsted noted the urgent need to cut its costs, requiring a restructuring of senior and middle leadership, increased teacher contact time and cutbacks in provision. It is not clear how leadership that allowed a deficit to double over three years can be considered good.
- A school was judged good in March 2014 when it had a deficit of £703k. Ofsted said ‘The school is currently in a deficit budget but strong plans are in place with the local authority to ensure that the school has financial stability within the next three years.’ By March 2015 the deficit had doubled to £1.4m and by March 2016 it had increased again to £2.1m.
- Another school with a deficit of £1.95m in March 2015 was inspected in June 2015 and judged as Requires Improvement. The report notes ‘Governors have a good oversight of finance. They receive regular reports on how pupil premium monies are allocated and how they contribute to improving the achievement and attainment of disadvantaged students.’ There was no mention of the deficit.
- One report did state that a school which was put into Special Measures in 2013 was financially unstable (it had a deficit of £645k at the time which later rose to over £1m) and that it should work with external partners to secure the financial stability of the school in the short and medium term. It closed in 2015 and became an Academy together with another school.
The simple fact of future funding representing a real terms cut for all schools suggests that schools already in deficit will face an impossible task. Should Ofsted change the framework to specifically address financial leadership and financial control? Should the inspectorate go further, and make the existence of a deficit a limiting judgement for good and outstanding inspection results? What do you think?
Education Funding Agency Financial Notices to Improve
The EFA issues Financial Notices to Improve where there are concerns about academy finances. This is usually accompanied by the withdrawal of delegation until the concerns are addressed. The current list of open and closed notices can be found at https://www.gov.uk/government/collections/academies-financial-notices-to-improve.
Some of the most common issues that cause FNtIs to be issued include budgets being in deficit, often with no effective recovery plan in place, cash flow difficulties, and conflicts of interest where Trustees or Directors are in a position of receiving payment for services. Other issues include misuse of credit cards or other resources paid for by the school, failure to submit financial returns or accounts being qualified due to material errors, and poor financial management and controls. There is often a breach of the Academy Financial Handbook.
The NAO Financial Sustainability report found that the EFA ‘has a process for assessing financial risk in academies but its records make it difficult to gain assurance that all academies at potentially high risk have been dealt with consistently.’ It felt that the process involved too much subjective judgement and that interventions may not always result in trusts successfully addressing the financial issues, as academies may come off the national concerns list but return later.
The EFA also conducts investigations into academies where there are specific concerns about the use of funding. These are worth reading to identify issues that can cause serious problems; they can be found at https://www.gov.uk/government/collections/academies-investigation-reports.
EFA intervention in LAs which do not address deficits/excessive surpluses
Local authority maintained schools must notify the LA if they cannot balance their budget, to request a Licensed Deficit. It is illegal to set an unbalanced budget. If the LA has concerns about the school’s ability to manage its finances, conditions can be attached to the Licensed Deficit. A warning notice could be issued if concerns come within the definition of ‘a serious breakdown in the way the school is managed or governed which is prejudicing, or likely to prejudice, such standards of performance’.
Otherwise, the ultimate sanction is to withdraw delegation, but this is often viewed as a last resort.
The EFA is supposed to raise concerns if an LA has a significant number of schools either in deficit or with excessive surpluses, as this is indicative of an LA’s lack of action to ensure better financial performance.
The NAO Financial Sustainability report was critical of EFA’s processes for identifying LAs eligible for intervention: ‘In counting the number of schools which met its criteria for intervention, the Agency includes only schools which have had excessive deficits or surpluses for four continuous years. It excludes any maintained schools which have opened, closed or converted to an academy during the period.’ This criteria did not correctly identify LAs which should have been subject to intervention.
The NAO therefore made a recommendation that ‘The Agency should intervene more often and earlier when it has financial concerns about maintained schools.’ It is therefore to be expected that LAs will come under pressure to work more proactively with schools on deficits and excessive surpluses.
The Public Accounts Committee considered the NAO report and questioned DfE about its approach with academies in deficit. Peter Lauener stated that in 2011/12, 100% of deficit funding provided to academies was non-repayable. In 2015-16, close to 85% of the deficit funding was repayable. Subsequently, the Department provided written evidence to the Committee as follows:
‘Over the last three financial years, the number of academies in receipt of deficit funding is as follows:
- 2014-15 financial year: 14 cases (0.3% of open academies), total value £3.5m, of which 4 cases had a non-recoverable element of £1m.
- 2015-16 financial year: 23 cases (0.4% of open academies), total value £5.1m, of which 7 cases had a non-recoverable element of £1.5m.
- 2016-17 (to date): 47 cases (0.7% of open academies), total value £11.8m, of which 5 cases had a non-recoverable element of £2.6m.’
While the Department does not publish details of balances for individual academies, this information is useful in that it indicates an increasing level of deficits in academies.
Accountability system statement
There is a document which outlines the accountability system for education and children’s services, which can be found at https://www.gov.uk/government/publications/accountability-system-statement–2. This provides good explanations of the accountability framework for schools and academies, including their responsibilities as well as those of LAs and the Education Funding Agency.
The issue is whether the implementation of the relevant systems is robust enough to pre-empt financial difficulties and put measures in place to provide the necessary support to schools and academies.
There is no doubt that the funding landscape will be much more challenging in future and unless schools start preparing now, the risk of falling into deficit will be real. It is only those schools that are sitting on substantial balances that will have more time to achieve a sustainable budget.
We are pleased to see that the new Governance Handbook contains stronger links between educational performance and financial performance. However, as we have shown, there are other areas of guidance where more needs to be done to address deficits in schools. The trends are already indicating problems for more schools in balancing their budgets; if the NFF proposals go ahead without a sufficient uplift in funding, it will become increasingly difficult to maintain standards.