Schemes for financing schools – section 4

The treatment of surplus and deficit balances arising in relation to budget shares

4.1 The right to carry forward surplus balances

Schools may carry forward from one financial year to the next any shortfall in expenditure relative to the school’s budget share for the year plus or minus any balance brought forward from the previous year.

4.2 Reporting on and control of the use of surplus balances

Local authorities are no longer required to operate a balance control mechanism.

The Authority will, however, provide Schools’ Forum with the level of year-end balances held by schools and the balance as a percentage of the delegated budget, plus the data for the previous three years. Schools’ Forum will decide whether any schools will be required to provide additional information regarding the proposed use of those balances, if it has concerns over that school’s financial management. Schools’ Forum may commission the Authority to collect the information or collect the information directly. Schools’ Forum must make information so collected available to the Authority on request.

4.3 Interest on surplus balances

Balances held by the Authority on behalf of schools will not attract interest.

4.4 Obligation to carry forward deficit balances

Where a schools expenditure in a financial year exceeds the schools budget share plus any surplus/deficit balances carried forward from a previous year, this will generate a deficit balance to be carried forward to the next financial year. Any such deficit balances will form a first charge and be deducted from the following year’s budget share.

Unless the deficit is very small and can be managed within the school’s normal cash flow, as soon as the school foresees such a situation is likely to arise it must seek advice of the Chief Finance Officer and Director of Education with proposals as to how the situation will be addressed.

Details of the amount of balances carried forward from one financial year to the next will be reflected in the relevant out-turn statement published under s.251.

4.5 Planning for deficit budgets

Schools are required to operate on the basis of a balanced budget agreed with the Authority and are not permitted to plan for deficits in their initial budget plan. In the event that a school unavoidably generates a deficit balance then section 4.9 of the scheme shall apply.

4.6 Charging of interest on budget advances

The Authority is permitted to charge interest on any cash advanced to fund deficit balances. Interest on deficit balances will be calculated on a daily basis and may be charged at a rate up to base rate plus 2% though this will normally be waived provided the Authority has agreed the business plan to address a deficit position.

4.7 Writing off deficits

The Authority is not permitted to write off the deficit balance of any school.

4.8 Balances of closing and replacement schools

When a school closes, any balance, whether surplus or deficit shall revert to the Authority; it cannot be transferred as a balance to any other school, even where the school is a successor to the closing school. The closing school must make all reasonable endeavours to avoid a deficit balance on closure.

The Authority may make allocations to new schools which have the effect of giving them the benefit of additional sums which are equal to the balances of the relevant closing schools.

Where a school converts to academy status (whether as a standalone academy or as part of a multi academy trust) under section 4(1)(a) of the Academies Act 2010, the Authority must pay to the new academy school an amount equal to the surplus balance of the school at the date of conversion.

Where a school with a deficit balance converts to academy status (whether as a standalone academy or as part of a multi academy trust) under section 4(1)(a) of the Academies Act 2010, the Authority shall be compensated by central government for the amount of deficit inherited at the date of conversion. Central government will then recover the deficit from budget allocations made by them to the new academy.

Where a school converts to academy status as a sponsored academy due to being eligible for intervention, the Authority will pay to the academy school an amount equal to the surplus balance of the school at the date of conversion. Where a school with a deficit balance converts to academy status as a sponsored academy due to being eligible for intervention, the amount of the deficit is transferred to the Authority. The Authority may charge some or all of the cost of deficit against the Dedicated Schools Grant.

4.9 Planned (licensed) deficits

The LA will permit schools to plan for a deficit budget in particular circumstances. The funding to allow such a deficit budget shall be provided from the collective surplus of school balances held by the authority on behalf of schools although it is open to the local authority, in circumstances where there is no such surplus, to make alternative arrangements if it can do so within the relevant local authority finance legislation.

The requirements are set out below:

• The maximum length over which schools may repay the deficit, i.e. reach at least a zero balance with appropriate mechanism to ensure that the deficit is not simply extended indefinitely, would normally be five years.
• The deficit will only be agreed to allow a school in the short term to maintain a level of spend which in the opinion of the Head of the Education Service is the minimum required to deliver the National Curriculum.
• The maximum size of the deficit in normal circumstances will not exceed 5% of the school’s budget share.
• The maximum proportion of the collective balances held by the LA, which would be used to back the arrangement, shall not exceed 20%.
• Before a deficit budget is approved, the school must produce a detailed deficit recovery plan in the prescribed format for the duration of the planned period of the deficit, which will be reviewed and updated at least annually.
• The school must provide to the local authority any additional information/school data requested in relation to the deficit recovery within a reasonable timescale. This may include information on staffing structures, class/timetable arrangements, curriculum plans etc.
• The school must submit monthly budget monitoring reports to the local authority.
• The school must meet with the local authority at least every 6 months to review progress of the deficit recovery plan and attend Schools’ Forum if requested.
• A member of the LA may attend the school’s Governor Meetings where the budget is to be discussed.
• The Head of the Education Service, jointly with the Chief Finance Officer, would be responsible for approving any deficit.
• Should a school not comply with the requirements of the licensed deficit, and/or the deficit recovery plan is not being adhered to, the authority may issue a Notice of Concern (see paragraph 2.21) which may ultimately result in withdrawal of financial delegation.

The Local Authority will inform schools annually on the guidelines to setting a deficit budget and any additional requirements in operating with a licensed deficit.

Schools with an approved licensed deficit may request a budget advance to meet a deficit balance where cash flow problems are experienced until the situation can be corrected and the deficit removed.

4.10 Loan Schemes

Loans must only be used to assist schools in spreading the cost over more than one year of large one-off individual items of a capital nature that have a benefit to the school lasting more than one financial or academic year. Loans cannot be used as a means of funding a deficit that has arisen because a school’s recurrent costs exceed its current income.

There is currently no loan scheme available to Reading Borough Council Schools, and schools with a deficit are covered by a licensed deficit as set out in paragraph 4.9.

4.11 Credit union approach

Schools may group together to utilise externally held balances for a credit union approach to loans. If doing so and if the authority does not act as administrator of such an arrangement, audit certification will be required.