Concern has been raised over a plan for government officials to contact academy trusts if their reserves drop to less than 5 per cent of income.
The plan is set out in guidance issued yesterday by the Education and Skills Funding Agency (ESFA) that has been interpreted as setting an informal “threshold” for the reserves that trusts can hold.
The guidance states that academy trusts have flexibility in deciding the level of financial reserves to hold.
However, the ESFA will get in touch if reserves are at, or decline to, under 5 per cent of the trust’s income - to discuss any “potential support”.
The ESFA will also get in touch with trusts if they hold reserves of 20 per cent of their total income or more.
The trust will likely be asked what it is planning to do with the high levels of reserves in this situation, though will not be asked to spend the money.
Stephen Morales, chief executive of the Institute of School Business Leadership (ISBL), said the prospect of getting a call from the ESFA due to falling financial reserves would “generate anxiety” as schools continue to struggle financially.
Academy trust ‘reserve limits’
Mr Morales told Tes: “I think it’s unreasonable to suggest reserve limits in an environment where many schools are staring down the barrel at in-year deficits and, in the case of trusts, a potential ‘going concern’ qualification.
“It strikes me as a bit odd to introduce reserve thresholds at a time when the sector is under such financial pressure.”
While the ESFA document is only guidance, “schools will feel like they have to stick to between 5 and 20 per cent reserves, and for those struggling, that will take money away from the frontline”, he said.
Mr Morales added: “It feels like schools and trusts are being asked to find more money from their budgets to create headroom for larger reserves at a time when they are struggling to fund fundamental aspects of their operations.”
Academy trusts must have a reserves policy in place. They are allowed to hold reserves for future contingency planning, planned investment, cashflow and development, with trustees deciding the appropriate level of reserves to hold.
The ESFA guidance states: “For trusts actively choosing to hold low levels of reserves, trustees should ensure there is sufficient contingency in case of anything unforeseen, as for some trusts, low reserves could suggest financial vulnerability.”
Julia Harnden, funding specialist at the Association of School and College Leaders, said it was “useful for trusts to have an awareness of the likely threshold for intervention from the ESFA” but she also sounded a note of caution.
‘Risk of confusion’
“Hinting at specific figures as being appropriate or inappropriate risks confusion as it undermines the assertion elsewhere in the guidance that the ESFA does not require any specific level of reserves, provided that trusts are not in deficit,” she said.
Ms Harnden added: “It is important that trusts feel free to develop a policy that is appropriate for their context.”
A poll of academy executives carried out by the Confederation of Schools Trusts (CST) earlier this year showed that many trusts were worried about their financial sustainability.
In response to the latest guidance, Leora Cruddas, chief executive of the CST, said: “It is crucial for long-term stability that trusts have a well-thought-through reserves policy, and most trusts do.”
The guidance is “clear that the ESFA does not set a required level of reserves”, she said, adding: “It is an important principle that trustees decide the level of reserves to hold that is appropriate for the individual circumstances and priorities of their trust.”
A Department for Education spokesperson said: ”
We recognise that some trusts will be facing more significant financial difficulty and our starting approach will always be to have supportive conversations to explore the challenges schools and trusts are facing and suggest the practical ways we may be able to help.
“Reserves data forms the basis of these conversations which is why get in contact with trusts that have reserves less than 5% of their income or more than 20%.
“We do not require trusts to hold a certain level of reserves because it is for the trustees to decide what level is appropriate for their individual trust’s circumstances.”
