Part 3: Schools in financial difficulty
3.1
In this Part, we explain what we mean by financial difficulty and why schools get into financial difficulty.
What we mean by financial difficulty
3.2
Most schools are financially sound. However, each year, we identify some schools that we consider to be in financial difficulty.
3.3
Generally, when we talk about schools being in financial difficulty, it is because they have a “working capital deficit”. This means that, at that point in time, the school needs to pay out more funds in the next 12 months than it has available. Although a school will receive further funding in that period, a school might find it difficult to pay bills as they fall due depending on the timing of that funding. A school with an overdraft or low levels of available cash is another sign of potential financial difficulty.
3.4
When we consider whether a school is in serious financial difficulty, we usually look at the size of its working capital deficit against its operations grant. Although many schools receive additional revenue, this is often through donations or fundraising, so it is discretionary. For most schools, the operations grant is their only guaranteed source of income. However, when we assess the financial position of a school, we take all factors into account.
The financial health of schools
3.5
At 31 December 2018, the average cash (and cash equivalents4 on hand for all schools was about $281,800. Individual school balances ranged from $20,458 in debt to $7.1 million in hand. In addition, schools held an average of about $339,200 of investments in longer-term deposits. However, almost a third of schools had no investments.
3.6
There can be many reasons why schools have high cash balances, including fundraising for significant building projects, advanced payments for international student fees, or cash held for others. Schools might hold funds on behalf of the Ministry for capital projects the school is managing, payments collected from international students for home-stay providers, or on behalf of other schools in “cluster”-type arrangements, such as transport networks.
3.7
A school’s available cash is important in ensuring that a school can pay its bills when they are due. However, cash and investments might be earmarked for a particular purpose, or there might be outstanding bills. This is why we also consider a school’s working capital position when considering whether a school is in financial difficulty.
3.8
For all schools, working capital as a percentage of a school’s operational grant ranges from -40% to 846%. At 31 December 2018, we identified 88 schools that had a working capital deficit. Of these:
- 55 schools had a working capital deficit between 0% and 10% of their operations grant;
- 22 schools had a working capital deficit between 10% and 20% of their operations grant; and
- 11 schools had a working capital deficit more than 20% of their operations grant.
3.9
Figure 5 shows that decile rating does not affect whether schools were in financial difficulty. Those schools with more serious working capital deficits come from across the deciles.
Figure 5
Schools with working capital deficit, by decile
There are 88 schools with working capital deficits across all deciles. There are 11 schools with working capital deficits greater than 20% of their operations grant.
| Schools with working capital deficits |
Schools with working capital deficits greater 20% of operations grant |
|
|---|---|---|
| Decile 1 | 9 | 2 |
| Decile 2 | 14 | 2 |
| Decile 3 | 10 | 0 |
| Decile 4 | 5 | 2 |
| Decile 5 | 11 | 2 |
| Decile 6 | 9 | 1 |
| Decile 7 | 4 | 0 |
| Decile 8 | 9 | 0 |
| Decile 9 | 8 | 1 |
| Decile 10 | 9 | 1 |
| Total | 88 | 11 |
Schools considered to be in serious financial difficulty
3.10
If a school is showing signs of being in financial difficulty, we ask the Ministry whether it will continue to support the school. If the Ministry confirms that it will continue to support the school, the school can complete its financial statements as a “going concern”. This means that the school can continue to operate and meet its financial obligations in the near future. If we consider a school’s financial difficulty to be serious, we draw attention to it in the school’s audit report.
3.11
Figure 6 shows 36 schools needed letters of support from the Ministry to confirm that they were a “going concern” for the 2018 school audits (2017: 44 schools). We referred to serious financial difficulties in 23 of those schools’ audit reports. Appendix 4 lists the schools where we referred to serious financial difficulties in the school’s audit report.
3.12
Nga Tawa Diocesan School, an integrated school, received a letter of support from its proprietor. The proprietor agreed to provide the school with financial support, as it had done for 2017.
Figure 6
Schools that needed letters of support in 2018 to confirm they were a “going concern”
Out of the 36 schools that needed a letter of support from the Ministry to confirm they were a “going concern”, six schools also had a letter of support in 2017 and 12 schools needed a letter of support in 2017 and earlier.
| Schools that needed a letter of support in 2018 | Schools that needed a letter of support in 2018 and 2017 | Schools that needed a letter of support in 2018, in 2017, and earlier |
|---|---|---|
| Bathgate Park School | Albany Junior High School | Avondale Intermediate |
| Bethlehem College | Bay Of Islands College | Cambridge East School |
| Bradford School | Mangere Bridge School | Castlecliff School |
| Burnside Primary School | Owhata School | Golden Bay High School |
| Green Island School | Tai Tapu School | Kadimah School |
| Halfway Bush School | Waitaki Boys’ High School | Omanaia School |
| Matauri Bay School | Pukehina School | |
| Maungakaramea School | Saint Brigid’s School (Dunedin) | |
| Ōhoka School | Saint Joseph’s School (Grey Lynn) | |
| Oropi School | Solway School | |
| Our Lady Star of the Sea School (Christchurch) | Te Wharekura o Mauao | |
| Pahoia School | Waipahihi School | |
| Pine Hill School | ||
| Saint Joseph’s Catholic School Matata | ||
| Taikura Rudolf Steiner School | ||
| Tamatea School | ||
| Te Kura Kaupapa Māori o Otara | ||
| Westown School |
3.13
We also referred to the financial difficulties in audit reports of five schools for previous-year audits: Te Kura o Pakipaki (2014), Te Wharekura o Mauao (2016 and 2017), Berhampore School (2017), Hato Paora College (2017), and Te Kura o Ngāpuke (2017).
3.14
The number of schools in financial difficulty remains about the same each year (about 40 schools), but it is not always the same schools. Of those schools identified in our report last year, 27 are no longer considered to be in financial difficulty. Of the 36 schools considered to be in serious financial difficulties in 2018, 18 had also required a letter of support the previous year. Twelve of those had also required a letter of support in earlier years.
Why do schools get into financial difficulty?
3.15
Schools in financial difficulty often have some of these characteristics:
- There is a recent drop in the number of children attending a school (school roll).
- There is a large overuse of the school’s entitlement of Ministry-funded teachers (banking staffing).
- The school uses a large percentage of its operations grant to fund salaries.
3.16
School funding, both the base operations grant and teachers’ salaries funding, depends on the school roll. The school roll can also affect how much funds are raised from the school community. When a school roll drops significantly, the school might not be able to adjust its expenditure quickly enough to make up for the loss in revenue because it might have already committed to some expenditure. School boards might also choose to keep staff because they believe the school roll will increase again.
3.17
Each school is given an entitlement of teachers that the Ministry will fund. The entitlement is based on the size of the school roll. This is called “banking staffing”. If a school has more teachers than its allocation, and it does not choose to pay them directly from its own funds, it will overuse the entitlement and have to pay the Ministry back. This will reduce the operations grant the school receives in the next year. Schools need to actively monitor their banking staffing balances. However, this might not always be considered as part of the financial information at monthly board meetings, because it is often not included in the school’s budget.
3.18
All schools pay non-teaching staff from their operations grant. Schools can also choose to use their operations grant to fund additional teachers. Most of the schools in financial difficulty use the equivalent of more than half of their operations grant to pay staff (overall, an average of 81%). This was higher than the average for all schools that used the equivalent of 60% to 71% (depending on decile) of their operations grant to pay staff.
3.19
It is not necessarily a problem for a school to use a large percentage of its operations grant to pay staff. However, it can mean that a school will need to rely heavily on other sources of funding. Because many of these sources are discretionary, such as school donations, problems can occur when schools do not collect as much revenue from other sources as they expect and have to spend their cash reserves. This can result in schools getting into financial difficulty.
3.20
Figure 7 shows board-funded salaries as a percentage of a school’s operations grant, by decile. The number of schools that fall into each band is similar for all deciles. However, deciles 9 and 10 have more schools funding salaries that are equivalent to more than 100% of their operations grant. About half the schools that use the equivalent of more than 100% of their operations grant to pay staff have international students. These schools received about 9% (decile 3) to 27% (decile 10) of their locally raised funds from international student revenue, on average.
Figure 7
Payments to board-funded staff as a percentage of the school’s operations grant, by decile
The table shows the cost of board-funded staff as a percentage of a school’s operations grant. The number of schools in each 20% band is similar for all deciles. However, deciles 9 and 10 have more schools that must rely on other sources of income to pay staff, because they pay out more in staff costs than they receive in operations grants.
| Decile | Percentage of operations grant that schools use to pay staff | Number of schools | |||||
|---|---|---|---|---|---|---|---|
| 0-19 | 20-39 | 40-59 | 60-79 | 80-100 | 100+ | ||
| 1 | 2 | 24 | 83 | 83 | 14 | 8 | 214 |
| 2 | 0 | 21 | 84 | 67 | 19 | 9 | 200 |
| 3 | 2 | 13 | 86 | 85 | 22 | 12 | 220 |
| 4 | 3 | 15 | 67 | 84 | 27 | 10 | 206 |
| 5 | 3 | 22 | 76 | 74 | 33 | 12 | 220 |
| 6 | 3 | 13 | 72 | 80 | 27 | 11 | 206 |
| 7 | 0 | 15 | 64 | 87 | 37 | 10 | 213 |
| 8 | 0 | 19 | 63 | 96 | 31 | 12 | 221 |
| 9 | 3 | 8 | 71 | 77 | 36 | 18 | 213 |
| 10 | 2 | 5 | 55 | 81 | 48 | 28 | 219 |
| Total | 18 | 155 | 721 | 814 | 294 | 130 | 2132 |
Note: The table is limited to schools with data entered into the Ministry’s database of schools’ financial statements as at August 2019.
3.21
For 2018, 551 schools got revenue from international students. For most of those, that revenue was equivalent to less than 10% of the school’s total expenditure (excluding teachers’ salaries). However, the revenue for 11 schools was equivalent to more than 20% of the school’s expenditure. The highest percentage was 34.46%.
3.22
For these schools, there might be a risk of over-reliance on revenue from international students, which could cause the school problems should numbers drop significantly. Figure 8 shows that international student numbers in the schooling sector has increased steadily since 2006, although numbers dropped significantly in earlier years. In that same time period, average tuition fees have increased by 50% to $14,500.5
Figure 8
Numbers of international students for all schools by year, 2003-2018
This graph shows numbers of international students have steadily increased since a drop in students in 2006, with the number of international students overtaking the previously high numbers of students in 2003.
4: Funds held on term deposit for three months or less.
5: Export Education Levy: Full-year statistics 2018 (Corrected 8 October 2019). Figures include all New Zealand schools.