Part 8: Payments above a school principal's normal salary

8.1
This Part summarises the results of a review of the additional remuneration paid to secondary school principals in the 2009 school year. "Additional remuneration" means payments that were above the school principals' normal salaries. In general, additional remuneration from a school board of trustees (a board) to a principal requires prior approval by the Ministry of Education (the Ministry). Payments made by a board without the required approval are unlawful.

8.2
Overall, the value of unlawful additional remuneration has probably decreased since we carried out a similar review about six years ago. We cannot be more definitive because the two reviews were not carried out on exactly the same basis. A direct comparison is not possible.

8.3
The Ministry and the New Zealand School Trustees Association (NZSTA) have put some effort into educating boards about the rules on additional remuneration. Our latest review has identified a number of specific areas where additional guidance on what is regarded as remuneration rather than reimbursement of business expenses would be useful.

8.4
On the question of recovering unlawful payments, we note that the Ministry has now concluded that changes to the Education Act 1989 are not warranted. The Ministry has confirmed that, ultimately, in cases of persistent non-compliance by a board, a statutory intervention can be considered if there is any risk to the operation of the school.

8.5
We have shared the findings of this review and our concerns with the Ministry. In our view, the proposed improved guidance to schools will be of benefit and should help reduce the incidence of unlawful payments. We also agree with the actions intended to maintain the transparency of payments by proprietors and to encourage compliance with the expectation that consideration will be given to recovering funds that have been wrongfully paid or used.

8.6
The Ministry has not commented on the other issues that we raised about payments by proprietors of integrated schools – that is, the possibility that some payments may be unlawful, the higher amounts paid than would be allowed for non-integrated schools, and the management of conflicts of interests. We consider that the Ministry should address these issues further.

The remuneration system

8.7
There are about 2450 state schools, which vary considerably in size and location – from small rural schools with a single teacher to large inner-city schools with more than 2500 students.

8.8
Schools are governed by boards of trustees, made up of members of the local community (mainly parents of children attending the school). There are about 18,000 trustees, who are appointed through elections held every three years.

8.9
Principals are responsible for the overall management and professional leadership of the school. Their remuneration is set by collective agreements or individual employment agreements based on the collective. The Ministry approves these agreements, which set out how much a principal will be paid to carry out their normal duties.

8.10
The salaries of principals for normal duties depend on factors such as the number of students and teachers in the school. The salaries vary from about $80,000 to about $160,000 a year.

8.11
Principals may also receive additional remuneration when they have other responsibilities, such as:

• managing a residential/boarding hostel;
• recruiting and managing many overseas students;
• managing a significant initiative that earns extra revenue for the school and is in addition to the principal's normal role;
• managing a school that is considered an exemplar of practice that results in other schools seeking information and advice; or
• implementing a significant change process.

8.12
The Ministry has to approve all additional remuneration. This approval process is commonly referred to as concurrence. Figure 18 describes the sorts of transactions that are considered remuneration (and require the approval of the Ministry) and those that are not remuneration (and do not require Ministry approval).

Figure 18
Examples of transactions that do and do not require the Ministry's approval

8.13
The main factor that the Ministry considers when approving additional remuneration is whether the principal has additional responsibilities above those that normally form part of a principal's job. Payments recognising performance, recruitment, or retention are unlikely to be approved, because the Ministry considers that they are factored into the employment agreements. Additional benefits such as cars, insurance, and expense accounts are also unlikely to be approved. Approval is not required for the reimbursement of work-related expenses on an actual and reasonable basis.

8.14
The maximum additional remuneration that the Ministry will approve is restricted currently to 15% of the principal's salary for normal duties. Therefore, the maximum additional remuneration is likely to be no more than $24,000 a year. Approvals are granted for one school year at a time. If a board wishes to continue providing additional remuneration, it has to apply each year for approval.

8.15
For the 2009 school year, the Ministry approved additional remuneration for about 63 (15%) of the 420 principals of secondary schools.³³ The total value of the additional remuneration was about $785,000, with an average of about $12,500. The amount of the additional remuneration approved varied from $3,000 to $21,000.

Our first review of principals' remuneration

8.16
In June 2004, we reported³⁴ on a special exercise that we had asked our appointed auditors to carry out at secondary schools. We found that some boards were paying additional remuneration without the Ministry's approval. In our opinion, 46 boards (11%) had paid additional remuneration to their principals without Ministry approval. The total value of these payments was at least $210,000.

8.17
We and the Ministry were concerned about the extent of unapproved additional remuneration. The Ministry told us that it planned to investigate the payments, and indicated that it might consider recovering some of the money, based on legal advice and analysis of the facts of each case.

8.18
The Ministry also told us that it would ensure that all future guidance to boards would be clear about the need to obtain approval for additional remuneration.

8.19
We also reported that the principals of some integrated schools received remuneration from the school proprietors³⁵ as well as receiving their normal salary. We were concerned that such arrangements might breach section 7(4) of the Private Schools Conditional Integration Act 1975, which requires proprietors (as part of the integration agreement) to agree not to give board employees any remuneration additional to that provided for under the Act or more favourable conditions of service.

Our April 2007 report on progress

8.20
In April 2007, we reported³⁶ on the Ministry's progress in addressing the concerns that we had identified in our first review. We were pleased to report that the Ministry had taken action to prevent unlawful remuneration payments through the central payroll system. It had also followed up with schools where we had identified examples of unlawful expenditure, and reminded all schools of the requirement to get the Ministry's approval for any additional remuneration.

8.21
We noted the unsatisfactory situation that a board can make an unlawful payment to its principal, and continue to make unlawful payments, and not be required by either legislation or the Ministry to consider recovering that money. The Ministry had obtained a legal opinion in December 2005 about whether it was possible or appropriate for the Ministry, rather than the responsible board, to pursue recovery. We reported that the Ministry continued to consider how to address enforcement and recovery issues, including the possibility of a change in legislation.

8.22
We also noted that the Ministry had not finished considering what action to take about the payments made by some proprietors to the principals of integrated schools.

Our May 2009 report on progress

8.23
In May 2009, we reported again³⁷ on the Ministry's progress in addressing our concerns.

8.24
With regard to recovering unlawful remuneration paid to principals, the Ministry told us that it was considering recommending a change of legislation to broaden the grounds on which an intervention could be considered.

8.25
With regard to payments to the principals of integrated schools by proprietors, the Ministry told us that it was continuing to consider whether to request a statement from each proprietor of any money paid.

Our most recent review of principals' remuneration

8.26
Because of concerns at a particular school,³⁸ which arose in the early part of 2009, the Ministry asked that we carry out another special exercise, similar to the one we reported on in June 2004.

8.27
As part of the 2009 school audits, our appointed auditors reviewed whether the principals of the 420 secondary (and composite) schools had received additional remuneration and, if so, whether the boards had the Ministry's approval to provide that additional remuneration. We received the results of 411 of these reviews and shared them with the Ministry, so that it could consider whether any action is necessary. We have not received the results for the remaining nine schools because the audits have not been completed.

What did we find?

8.28
In 329 of the 411 schools (80%), the appointed auditors reported that either the principal had not received any additional remuneration or the additional remuneration they received had been approved by the Ministry.

8.29
At 82 schools (20%), the appointed auditors found that either additional remuneration had been paid without approval or it was not clear whether some payments were remuneration that would need the Ministry's approval – for example, because the guidance is not precise enough.

8.30
In most of these cases, the additional payments were not of large value. However, the underlying principles are still important. First, payments that are remuneration are only lawful if they are approved. All public entities must take their legal responsibilities seriously. Second, there is always heightened sensitivity around payments that could create private benefits, even if they are genuine business expenses. These payments need to be managed with extra care to ensure that they can withstand public scrutiny. Therefore, it is a concern when it is unclear whether a payment is for a business expense or is effectively remuneration. Third, in some circumstances, the reimbursement of a private expense may be a crime and subject to prosecution by the police.

Home telephone and internet

8.31
The most common form of additional payment at these schools was paying the principal's home telephone or internet bill. At 52 of the 411 schools (13%), the principal was reimbursed for part or all of their home telephone and/or internet costs. The maximum amount reimbursed was $2,500 in the year. The Ministry has confirmed that the cost of telephone and internet rental is additional remuneration requiring its approval unless the facility is installed for only work-related activities.

8.32
In our view, to reduce the variability of practice, it would be useful for the Ministry to clarify the circumstances where a school may meet some or all of the costs of a principal's home telephone and internet use as a business expense.

Use of a car

8.33
At 11 of the 411 schools (3%), principals can use a car that the school pays for. In one case, the cost of the leased car, which is also used for school purposes, is about $10,000 a year. Some principals take the school car home every night and at weekends for security reasons because there is no garage at the school. In some cases, the principal is allowed to use the car for their own purposes, and in others the principal is allowed to drive the car only to and from the school.

8.34
Again, to reduce the variability of practice, we consider it would be useful for the Ministry to clarify the circumstances where a school may allow a principal to use a car that the school pays for.

Insurance

8.35
Six boards paid the premiums for various insurance policies for their principals. Examples of the premiums are $3,500 for income protection, $3,000 for medical insurance, and $750 for life insurance.

8.36
We also noticed that one of the principals' representative bodies is offering a legal support scheme for principals at a cost of about $300 a year. In some schools, the board has paid the premium for this insurance. The Ministry has confirmed that boards need to seek its approval before paying this premium because it regards the scheme as providing a personal rather than a work-related benefit.

Koru Club and Rotary Club membership

8.37
Seven principals had their Koru Club membership paid by their boards. In one case, the payment was $745. A further four principals had been reimbursed their membership of the Rotary Club. We have been told that the Ministry has reviewed its position on Koru Club memberships and is now prepared to give approval where a principal makes enough work-related flights in a year.

Other remuneration

8.38
Sixteen principals received other forms of additional remuneration without the Ministry's approval. Those forms of additional remuneration included:

• subsidised or free accommodation provided by the board;
• an expense account of $2,000 a year for personal expenses such as gym membership fees;
• an overseas travel allowance of $4,200; and
• $6,000 for house master duties in connection with a hostel.

Remuneration from the proprietors of integrated schools

8.39
In our June 2004 report, we mentioned that the principals of some integrated schools received additional remuneration from the proprietor. We were concerned that some of this remuneration could be inconsistent with the Private Schools Conditional Integration Act 1975. The Act requires proprietors, as part of the integration agreement, to agree not to give board employees additional remuneration other than under the Act or more favourable conditions of employment.

8.40
In our April 2007 report, we concluded that the current arrangements did not allow the Ministry to monitor compliance with legislation, because it would not know whether a principal received any additional remuneration from a proprietor for carrying out the normal duties of a principal. We recommended that the Ministry regularly ask each proprietor for a statement of all money paid directly to all school staff, the amounts involved, and the reasons for the payments. The Ministry confirmed that it would consider whether it would be appropriate to include a provision to this effect in its integration agreements (which are agreements that proprietors have to sign to receive funding from the Ministry).

8.41
In June 2009, the Ministry said that it was considering issuing a newsletter on the matter.

8.42
Some schools have a boarding hostel for their students. Where a hostel is the responsibility of the board, the Ministry may approve additional remuneration for the principal of up to 15% of their normal salary for managing the hostel. Where a hostel is the responsibility of the proprietor, the principal may have an employment contract with the proprietor. If they do, the amount of the additional remuneration is not subject to Ministry approval or restricted to 15% of the normal salary.

8.43
In our recent review, we noted that one principal receives remuneration from the proprietor of $31,500 for managing a hostel, which is 28% of their normal salary or about $14,500 more than the Ministry might have approved if the hostel were owned by the board. Another principal in a similar position receives $22,500 a year, which is about $4,000 more than the Ministry might have approved.

8.44
At two other integrated schools, the principal received remuneration from the board for managing the proprietor's hostel, with the approval of the Ministry, and they also received remuneration from the proprietor for what appear to be the same duties, possibly on the basis that the two bodies were sharing the costs. One principal received $13,300 from the board and $20,000 from the proprietor. The other principal received $11,300 from the board and $26,000 from the proprietor.

8.45
The Ministry has declined approval for these boards to pay further amounts. For the first school, it has considered whether the board should pursue recovery of the funds and concluded that the circumstances mean that recovery is not practicable or appropriate.

8.46
At another two integrated schools, the proprietor is paying the principals additional remuneration. The descriptions of these payments raise some questions. For example, one principal receives $10,000 for "special character", $10,000 for "senior college", $15,000 in a proprietor's performance payment, and $5,000 for incidental entertainment costs and mileage allowance. The payments total $40,000 a year. The other principal received similar payments totalling $29,000. A further principal of another school received similar payments from the proprietor of $14,300 and was provided with a rent-free house.

8.47
Because these benefits were not provided by the schools' boards, they did not need the approval of the Ministry. Nor are we able to gather detailed information on them. However, from the summary information we have gathered, it is not clear to us what these payments were for and whether they were consistent with the Private Schools Conditional Integration Act 1975. They may raise questions about how the relevant provision in the Act is being applied and enforced.

8.48
The relationships between a principal, board, and proprietor can also become more complex if a principal is personally receiving substantial payments from a proprietor for additional duties or activities. This adds a need to manage a personal financial interest to an already complex situation. The potential for a conflict of interest creates additional risk for all parties, and it could require the principal to withdraw from participating in some board decisions. The principal's interest in continuing to receive the payment from the proprietor may create an incentive to act in a way that may not be in the best interest of the board. In a previous inquiry into a school, we have stated that it is better for the most senior employee to be solely concerned with the interests of their public employer.

8.49
We note that the transparency of, and accountability for, these payments has decreased because the applicable financial reporting standards have been revised. There is no longer a requirement for boards to disclose in their financial statements any payments from proprietors to their principals. The relevant financial reporting standard is NZ IAS 24: Related Party Disclosures.

8.50
An earlier version of the standard defined related parties in such a way that included proprietors of integrated schools, because they have a significant influence over boards. However, a revision in November 2009 amended the definition so that, in our view, proprietors are no longer considered to be related parties. The Ministry has confirmed that it will consider using its statutory powers to require boards of integrated schools to include information on financial transactions with proprietors in their financial statements. This would maintain the current transparency. However, the completeness of the information would depend on the voluntary disclosure by principals, because boards would not necessarily know about such payments.

Payments from other third parties

8.51
We also identified that a school principal (not of an integrated school) is receiving payments from a third party. The school community has established a charitable trust. The school does not control the trust but helps it raise funds. From the funds raised with the help of the school, the trust makes payments to the school's employees, including a leadership award of $11,265 a year to the principal. The payments to the school employees are not assessable for tax purposes, because they are distributions to the beneficiaries of a charitable trust. The Inland Revenue Department has confirmed this position.

8.52
We have discussed this issue with the Ministry. The Ministry says that the payments do not form part of the teachers' normal remuneration and, because they do not come from their employer, the Ministry does not need to approve the payments.

8.53
The Ministry's central control of remuneration is designed in part to help maintain pay parity between schools. If schemes of this kind became widespread, there is a risk that they would undermine this policy objective. That is, charitable trusts could be established so that they are not controlled by schools, the schools could help the trusts with raising funds from the local community, and then the trusts could make payments to the school employees without the Ministry's approval and without paying tax.

8.54
The Ministry considers that there will be few schools in a position to establish a similar arrangement. It does not intend to take any action on the matter.

Recovery of unlawful payments

8.55
Our general expectation is that a public entity will consider whether to attempt to recover money if its funds have been wrongfully paid or used. This includes where remuneration has been paid inappropriately. There may be situations where it is unfair or impractical to insist that money wrongfully paid is repaid and where wrongful payments should not (or cannot) be recovered. Much depends on the circumstances of each case.

8.56
For this reason, we consider that the entity concerned, acting on its own legal advice, has to decide whether to seek to recover the money. The entity needs to consider the matter and decide what course of action is justified.

8.57
Applying this general expectation to the school's situation is made more complex because the board may have approved the additional and wrongful remuneration. The board may be unwilling to revisit its decision to make the payments. In such cases, we have asked whether there is anything the Ministry can do to address the misuse of funds.

8.58
Our June 2004 report noted that the Ministry was going to follow up the examples of unlawful expenditure that we had identified and consider whether it was possible or appropriate for the Ministry to seek to recover the money instead of the board. Our April 2007 report noted that the Ministry obtained a legal opinion on the matter in December 2005. In summary, that opinion said:

• It was appropriate for the Ministry to consider how to prevent and recover unlawful payments.
• However, the Ministry has no power to require a board to apply for approval of a payment of additional remuneration or to cease making an unlawful payment. Also, it is unable to direct a board to take action to recover an unlawful payment. A Minister is unlikely to be able to use their statutory powers of intervention in schools to require a board to take recovery action against an employee, or to replace a board with a Commissioner if a board was not prepared to seek recovery of an unlawful payment.
• Trustees might be personally liable for an unlawful payment they had made if it could be demonstrated that they did not act in good faith – for example, if they made the payment knowing it to be unlawful.

8.59
In our April 2007 report, we noted that the Ministry had considered the legal opinion and remained concerned that the principle of equality of remuneration for all state schools could be undermined if boards did not comply with its rules. We noted that the Ministry was considering how best to address enforcement and recovery issues, and that this might require a change in legislation to strengthen its ability to promote compliance with the current legislation. In this context, we noted that the legislation that existed before 2001 allowed a board to be replaced by a commissioner in wider circumstances than those currently allowed for.

8.60
We expressed the view that the current arrangements were unsatisfactory. A board can make an unlawful payment to its principal, continue to make unlawful payments, and not be required by either legislation or the Ministry to consider recovering the money. The only recourse that appeared to be available to the Ministry in these circumstances was to take action against trustees personally if it could be demonstrated that they had not acted in good faith.

8.61
In June 2009, the Ministry confirmed that it was continuing to consider whether to seek amendments to the Education Act 1989 to allow a commissioner to be appointed when there is an unlawful act.

8.62
In May 2010, the Ministry told us that it would not be pursuing an amendment to the Education Act. The Ministry considers that there have not been enough incidents to warrant legislative change and that placing an emphasis on preventing unlawful activity would be of greater benefit.

8.63
In June 2010, we asked the Ministry to clarify whether it shared our expectation that boards should be considering recovery when unlawful remuneration has been paid. The Ministry expressed its frustration that boards continued to make unlawful payments. When cases of possible non-compliance are brought to the Ministry's attention, the Ministry seeks clarification from the board. If the Ministry establishes that the board has not complied, it invites the board to apply for approval. If approval is either declined or not sought in such cases, and non-compliance persists, the Ministry's practice (without specific statutory powers) is to write to the board to remind them unequivocally of their obligations. Ultimately, in cases of persistent non-compliance, a statutory intervention can be considered if there is any risk to the operation of the school.

8.64
The Ministry has also confirmed that it will try to raise the level of understanding among boards and principals about the importance of always applying for approval for additional remuneration.

8.65
We acknowledge the legislative and other constraints faced by the Ministry, and that its role is largely limited to encouraging the responsible board to give proper consideration to recovery when unlawful remuneration has been paid. We also acknowledge that an increased emphasis on prevention of unlawful payments would be beneficial.

8.66
However, we are also of the view that the Ministry should take an active role in promoting consideration of recovery by the responsible board in cases that come to its attention. It could also usefully communicate this expectation to boards more generally.

Actions to be taken

8.67
We gave the Ministry an opportunity to comment on our findings and to explain the actions it intends to take to reduce the incidence of unlawful remuneration and address the other matters we found.

8.68
For the most common forms of possible unlawful remuneration (such as home telephone, internet, car, and insurance expenses), we expect the Ministry, in keeping with its established practice, to seek clarification from the relevant boards in due course, once it has finalised its future advice.

8.69
The Ministry told us that, as a matter of course, it checks and updates its advice to boards on approval for additional remuneration and benefits to principals following each principal collective agreement settlement. The Ministry has begun to do this piece of work in anticipation of new collective agreements replacing the existing collective agreements.

8.70
A particular focus of this update for the Ministry is to ensure that its advice is more accessible to trustees. This is to include reviewing the wording to ensure that plain English is used where possible, offering more examples and providing check lists for employers, and placing the material in more locations.

8.71
The Ministry is anticipating making the following points in that advice, some of which are amendments to its current advice:

• That reimbursement of home telephone or internet charges will only be approved where a business case can be made by the school. Examples of this will include the full or part reimbursement of a home telephone line where it is allocated to the role, and where it is promoted to the school community.
• The Ministry is aware that some principals take a vehicle home after hours because the school has no suitable storage facilities, or because the principal attends school activities, such as sport, after hours. This sort of use does not require approval. However, personal use, such as access to the car for non-work-related use during weekends, school holidays, and after hours would not be approved. Schools allowing this should seek reimbursement of the costs from the principal.
• Approval will not be granted for personal insurance premiums or legal support schemes.

8.72
The Ministry has also confirmed that it will consider requiring boards of integrated schools to disclose the financial transactions with proprietors in their financial statements. This will help maintain the current transparency of any remuneration received from proprietors by principals. The Ministry has not commented on the other issues raised concerning payments by proprietors – for example, the possibility of some of the payments being unlawful, equality of remuneration for all state schools, and the proper management of conflicts of interest.

8.73
The Ministry is also to publish a finance circular on the need for boards to consider recovery of unlawful payments. This should ensure that boards are aware of the general expectation that they consider recovering the money if an unlawful payment is made.

33: We did not ask our appointed auditors to look at the additional remuneration paid to the 2000 or so primary school principals because of their large number and our view that the risks are less.

34: Office of the Auditor-General (2004), Central government: Results of the 2002/03 audits, "Part 4: Payments for Additional Remuneration to School Principals", Wellington.

35: Integrated schools used to be private schools. They have proprietors who own the land and buildings of the school, maintain its special character (such as its religious nature), and appoint representatives to the board of trustees.

36: Office of the Auditor-General (2007), Central government: Results of the 2005/06 audits, "Part 7: Unlawful expenditure by schools", Wellington.

37: Office of the Auditor-General (2009), Central government: Results of the 2007/08 audits, "Part 11: Unlawful expenditure by schools – 2009 follow-up", Wellington.

38: Hamilton’s Fraser High School.