Part 9: Accountability for public funding of integrated schools

9.1
In our Annual Plan 2008/09, we signalled our intention to carry out a performance audit of how the Ministry of Education (the Ministry) manages the Crown's financial interest in integrated schools. In this Part, we discuss what the Ministry is doing to manage the risks associated with public funding of integrated schools and explain our decision to defer our audit.

9.2
We describe integrated schools, outline their funding sources, and discuss our concerns about how they account for their funding. We also comment on recent actions taken by the Ministry that prompted our decision to defer our performance audit.

Integrated schools and their funding

What are integrated schools?

9.3
Integrated schools are privately owned schools that are part of the state education system. They provide education within the framework of a particular or general religious or philosophical belief. The "special character" of an integrated school refers to its religious or philosophical character.

9.4
There are 327 integrated schools in New Zealand, comprising 13% of all state schools. They are governed by elected Boards of Trustees (Boards), which are Crown entities, in the same way that state schools are governed. However, integrated schools differ from other state schools because integrated schools have proprietors, which are private entities. The proprietors own, provide, and maintain the school buildings and land. They also have responsibility for maintaining the special character of their schools. The Boards are responsible for the teaching in, and operating of, their schools.

How are integrated schools funded?

9.5
Boards and proprietors both receive funding from the Government and both may also raise funding directly from private sources.¹ The Private Schools Conditional Integration Act 1975 (the Act) sets out which matters Boards and proprietors are each responsible for and gives proprietors some capacity to set compulsory charges for attendance at the school (known as "attendance dues"). There are also limits on what attendance dues can be used for. The Ministry is responsible for most of the public funding for integrated schools and administers the Act.

9.6
When a proprietor raises funds from parents or others, that is a transaction between two private sector parties even though the school office often provides administrative support. However, this fundraising has been the subject of public interest in the last year, usually because of concerns about the size of the donations being sought, confusion about whether the contribution is voluntary or compulsory, or a lack of clarity about whether the donation is for the (public sector) Board or the (private sector) proprietor.

9.7
The Government funds Boards for the teaching and operating costs of integrated schools and for minor maintenance, in the same way that it funds all other state schools.

9.8
The Government also provides public funding directly to proprietors for two purposes:

• "Policy One" funding, which is calculated on a per-pupil basis, is used for major maintenance of school buildings to keep them at the same standard as state schools; and
• "Policy Two" funding, which is used to help integrated schools finance their expansion to meet school roll growth that would otherwise have to be met by expanding local state schools.

9.9
In 2008/09, the Government spent $72.6 million to help proprietors of integrated schools modernise their existing property and expand their schools. The Ministry's accountability documents show funding allocations for integrated schools grouped with those for state schools, so a breakdown of public funding to Boards of integrated schools is not readily available.

Risks associated with public funding of integrated schools

9.10
We reported to Parliament in 2005 and 2006 that the financial boundaries between Boards and proprietors had become blurred, with some instances of public funds intended for the Boards' general operating expenses being spent on other purposes and for the benefit of the proprietors. In particular, some Boards had used their general public funding for capital expenditure, which is the responsibility of the proprietors.

9.11
In 2008, our concerns about how some integrated schools were using public funding led us to propose a performance audit of the Ministry's management of the Crown's financial interest in integrated schools. Our proposal was signalled in our Annual Plan 2008/09, which was published in May 2008.

9.12
We also note that, in April 2009, the Treasury raised concerns about the accountability of proprietors.

Actions taken by the Ministry to address funding issues

9.13
We carried out scoping work in 2009/10 for our performance audit. This scoping work included meeting with Ministry officials, and reviewing the Ministry's work since 2007 on managing the funding of integrated schools.

9.14
In our view, recent Ministry work has reduced the possibility that the Boards and proprietors of integrated schools can misspend public funds (intended for the Board's general operating expenses) on costs associated with land or buildings owned by proprietors. However, we consider that there still remains the possibility of inappropriate use of public funds by integrated schools. We discuss the Ministry's actions in the following paragraphs.

Improved guidance and fixing of past problems

9.15
The Ministry has improved its guidance to integrated schools to help prevent inappropriate spending of public funds on land or buildings owned by proprietors. An agreement was also signed between the Ministry and the Association of Proprietors of Integrated Schools (which represents proprietors) in December 2007 to "regularise" historic property expenditure issues. These issues related to Boards inappropriately using public funds for capital expenditure, which was the responsibility of school proprietors.

Probity audit into allocation of public funds in integrated schools

9.16
In late 2007, the Ministry released the findings of a probity audit it had commissioned that investigated how proprietors used Policy One and Policy Two funding. The audit found that most proprietors did not account separately for spending of Policy One funding, Policy Two funding, and their private funding. As a result, a view could not be formed about whether the Policy One and Policy Two funding was being spent only as intended, or whether there had been any under-spending or over-spending of these public funding allocations. The audit recommended that the Ministry require proprietors to maintain separate bank accounts and separate ledger balances for their different funding streams.

Moves towards strengthened financial reporting requirements for integrated schools

9.17
In 2008, the Ministry carried out a detailed review of integrated schools. It concluded that existing accounting arrangements for property costs at integrated schools were inadequate to provide the Crown with confidence that public funds were properly spent. The Ministry also noted that there was little incentive for proprietors to comply with Crown requirements.

9.18
The review recommended imposing specific accounting and planning requirements on proprietors. These included separating money received and spent, and establishing independent audits to ensure compliance with Crown requirements.

9.19
Ministry briefings in 2009 proposed strengthening the accountability requirements for integrated schools. The proposed changes aim to ensure that the accounts demonstrate that:

• proprietors have spent Policy One funding correctly;
• attendance dues have been set at levels justified by proprietors' property-related costs; and
• proprietors have spent public funding in a timely fashion.

9.20
In our view, these proposed changes demonstrate that the Ministry is aware of, and is attempting to address, the ongoing risks associated with the existing public funding arrangements for proprietors of integrated schools.

Changes to financial statements agreed to by the Ministry

9.21
In June 2009, the Ministry agreed that all integrated schools should disclose their proprietors as related parties and disclose all transactions between Boards and proprietors in the Boards' 2009 financial statements. In our view, these changes should improve the transparency of financial transactions between Boards and proprietors and how public funding is spent in integrated schools.

Concluding comments

9.22
The Ministry's actions and proposed changes should reduce risk and address the issues that prompted our consideration of a performance audit in May 2008. We intend to closely monitor the Ministry's progress on managing the risks and issues through our annual audits and ongoing relationship with the Ministry.

9.23
If we find that the risks associated with public funding of integrated schools are not being adequately and promptly addressed, we might decide to carry out a performance audit of the Ministry, as originally indicated. Alternatively, we might decide to carry out a performance audit of the financial relationship between Boards and proprietors, with a focus on aspects that our annual audits of integrated schools do not cover in detail.

1: For example, proprietors may seek voluntary financial contributions (from parents/caregivers) and fundraise for general, unspecified purposes.