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What if...trust finances changed in three core ways?
Until recently, the issue of school finances was largely the preserve of school business managers and governing body finance committees.
Headteachers and trust leaders knew they always needed more funding, but the complexity of the income formula - and the swirl of acronyms like GAG, IDACI, CIF or SCA - was something best left to the “experts”.
As a headteacher, I did not get that chance. I quickly learned the fundamentals of revenue, cost structures and how to balance budgets. This was due to being dropped into the deep end of headship in an “inadequate” school, with falling rolls and a terrifying cumulative deficit.
Multi-academy trust finances
But while I know my way around a school’s balance sheet, becoming a multi-academy trust (MAT) CEO required a new level of understanding, forcing me back to school, to deeply engage in finance so that as a large MAT accounting officer, I could be sure I was getting the best out of a team of talented accountants and school leaders.
On the basis of what I have learned over the years, I think we could be bolder in how we think about trust finances, in particular, so that we can leverage better value from the status quo.
School funding
Firstly, what if the trust sector pooled its reserves for investment?
The education sector holds around £6 billion in total reserves, with trusts holding slightly more than local authority-maintained schools.
Most of these reserves are kept in bank accounts, accruing base rate interest. When interest rates are high, this generates substantial income. However, when rates are low, the income decreases, and if below inflation, the value of the reserves diminishes.
Some trusts and local authorities have opted to invest their reserves in financial markets, with approval from the Education and Skills Funding Agency (ESFA) relating to standards of risk and ethical considerations.
These trusts typically see higher returns than bank interest, generating additional income or at least protecting the future value of their current reserves.
However, entirely understandably, not all trust boards or executive teams have the confidence or expertise to make such investments.
Investing reserves
When you consider just how many academy trusts are out there now, the proportion that actively manages their investments is absolutely tiny - which also obviously means that sector-wide, the potential for investment return is massive.
But given the skills gap and the nervousness of boards, what if the Department for Education or the Treasury facilitated a cooperative investment fund?
Just imagine: if the sector pooled its £6 billion and invested collectively, current market conditions could potentially yield around £600 million per year in income. This amount exceeds the national cost of supply teachers for a year, all while maintaining the original £6 billion reserve.
The arena is complex and presents a governance challenge both at ESFA (now DfE again) and in trusts.
However, given the potential upside with money for children on the table, surely it is worth some consideration?
Borrowing for the school estate
The second question I have is about borrowing.
School budgets run year to year and are based on the annual census. With increasing cost pressures there is almost no room in the annual budget for the required level of investment in buildings, estates, IT or environmental strategy. These projects are often expensive and require large investments over time.
This presents a bit of a stalemate as the demand is always greater than the small amount of funding supplied annually for capital projects.
Smaller trusts compete annually in the CIF (Condition Improvement Fund) lottery while larger trusts operate their own internal lottery via the SCA (School Condition Allocation), a small grant that falls woefully short of the actual money needed to keep pace with the degradation of our buildings.
Think about trying to build an extension to your house out of this month’s pay packet and paying cash. It just doesn’t add up!
Finance for capital building projects
What if schools were trusted to consider leveraging their finance and assets to generate additional income for this type of work?
For example, if a school were allowed to borrow money, yes take out a loan, to invest in solar panels.
The loan would be repaid out of the money the school now saves on energy bills; the cash that would have otherwise come out of the school budget for children remains delivering for education in school; and the school achieves both aims of spending their allocated budget on children, but also borrowing wisely to achieve longer-term savings and, therefore, increasing the budget available in future years.
Similar scenarios could be seen in investment in sports facilities, community assets and borrowing to increase the number of classrooms.
Schools and trusts do not engage in these financial instruments and rely on government investment.
The government would actually save money if they unlocked some of the borrowing opportunities for schools and trusts that had the vision and security to do it.
School funding formula
And finally, what if we reset our funding structure to accommodate fixed costs?
Surely now is the time to review the very basis upon which schools are funded. The sector has risen to the challenge of driving efficiency and working hard to develop tools such as curriculum-led financial planning to really understand cost structures in schools.
However, with the volatility in pupil numbers, the per-pupil funding structure is now failing to deliver.
Primary schools demonstrate very clearly that there are “fixed” costs rather than “variable” costs that simply cannot be made any more efficient.
Falling birth rate
A primary class that now only has 15 children, where in previous years they had 30, is losing 50 per cent of its income, but has the same amount of inbuilt cost, for example, the cost of the teacher, the cost of heating and lighting the classroom.
This reluctance to consider fixed-cost funding for primary schools is leaving many vulnerable and in financial dire straits. Unless we build into school funding the assumption that some costs are fixed and should not be directly impacted by annual variations in pupil numbers, we will see primary schools face the same end as the local post office.
We need a model in which a proportion of funding speaks to those fixed costs, with the remainder flexing in recognition of the number of children in each classroom.
These are three areas that could bring much-needed new resources into our cash-starved sector. While there is no magic money tree, there is, I believe, reason to be hopeful.
The sharp-eyed among you will have sighted the smoke signals sent up - even before the general election - that Sir Keir Starmer’s government is open to new models of public finance.
Let’s hope that the thumping great majority that he secured lets them speak - and act - into this space with confidence.
Tom Campbell is the CEO of E-ACT
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