In March this year, the Department for Education published a document for consultation, proposing school funding reform.

In light of consultation responses, Michael Gove has announced further arrangements for the reform of school funding for 2013–14.

The current funding formula for schools is unfair and inconsistent, with inequalities arising from the fact that similar schools across the country receive unacceptably different levels of funding

Why is change necessary?

There is widespread agreement that the current funding formula for schools is unfair and inconsistent, with inequalities arising from the fact that similar schools across the country receive unacceptably different levels of funding.

Michael Gove has already announced his intention to introduce a national funding formula in the next spending review period.

The changes to local funding arrangements announced in July are a step towards a simplified, consistent approach, although the policy direction will be felt more dramatically following the eventual introduction of the national funding formula.

What are the main proposals?

One of the most significant proposals relates to local funding arrangements for maintained schools.

Under the current system, local authorities ‘top-slice’ the part of the schools’ funding that they require to provide centralised services to schools. Individual local authorities have control over how much they will top-slice, before they pass on the remainder to schools.

‘Maximum delegation’

However, the government is now pushing for ‘maximum delegation’. The changes require local authorities to work on the basis that the whole of the designated schools grant (DSG) is delegated to schools directly, but that part of it will then either be returned to, or retained by, the local authority, if any of the following three circumstances apply.

1. Where the schools forum, acting on behalf of maintained schools in that area, agrees to purchase services centrally from the local authority. There is a limited list of services to which this can apply, such as insurance, staff costs or supply cover. Groups of maintained schools or academies are also free to pool their resources, in order to purchase other services from the local authority that are not on the list to be considered by the schools forum.
2. Where there are historic commitments to be funded out of the DSG, previously agreed between the schools forum and the local authority.
3. To meet the statutory functions of the local authority, such as with regard to admissions.

There are further exceptions, where local authorities can retain funding for equal pay back-pay and non-SEN places in independent schools.

Local authorities can still retain part of the funds to cover contingencies, but this is only in a very limited range of circumstances, such as for schools in financial difficulties or for closing schools.

What is the practical effect?

Local authorities can still retain part of the funds to cover contingencies, but this is only in a very limited range of circumstances

In simple terms, control of funding will be in the hands of schools.

For the most part, this is delegated to the schools forum, which will decide, as a group, whether to buy services back from the local authority, benefiting from economies of scale in the same way that academy groups do.

What about where there is a significant growth in pupil numbers?

Despite the overall principle of maximum delegation, local authorities will be able to create a ring-fenced ‘growth fund’ out of funds top-sliced from the DSG before it is delegated to schools.

This fund will only be able to be used for the purposes of providing for growth in pupil numbers, and will be for the benefit of both maintained schools and academies. Any funds remaining at the end of the financial year must be reallocated to maintained schools and academies the next year.

The local authority will draw up – and the schools forum will need to agree – the criteria setting out the circumstances of payment and the basis for calculating the sum to be paid. The schools forum will also be consulted over the total sum that will be top-sliced out of the DSG to be included in the fund.

With individual local authorities setting both the amount to be top-sliced and the criteria for payment, this is one area where coordination of local authorities (to depart from the existing discrepancies) may prove challenging.

How will local authorities be monitored?

The Education Funding Agency (EFA) is the arm of the DfE that oversees the school funding system generally. It is now the EFA that distributes pupil premium and DSG to local authorities, as well as providing general annual grant and other relevant grants directly to academies.

Part of its role will also be to ensure that local authorities are complying with the new formula and, where there may be local flexibility, interpreting the options reasonably.

What factors must local authorities take into account when delegating funding to schools?

The DfE has listed 10 ‘formula factors’ that local authorities can consider when determining the amount of funding to be allocated to schools.

Mandatory factors

The mandatory factors are:

• basic per-pupil entitlement – this will be at one rate for primary schools, but there will be different age-weighted rates for secondary schools
• deprivation – this will continue to form part of the DSG funding formula, as well as any pupil premium funding that the school may receive.

Optional factors

Although the government’s overall aim is to tighten the number of variables, there are a limited number of optional factors that local authorities can take into account. The intention is for these to focus on pupil characteristics.

These include:

• looked-after children
• low-cost, high-incidence special educational needs (local authorities will also be required to give schools a notional SEN budget, which will be expected to meet the needs of these pupils and contribute towards the cost of pupils with high needs)
• English as an additional language
• split-sites, rates and PFI
• exceptional premises factors, for example listed buildings
• sixth form classes, where the DSG has been used for this purpose in the past.

Schools will be anticipating confirmation of the budgets as the first true test. The government has acknowledged that new local formulae may alter budget share

Will the changes lead to a simpler, fairer and more consistent approach to funding?

Local authorities are required to submit their provisional schools budget local formula to the EFA by the end of October 2012, to enable local authorities to confirm budgets for maintained schools, and to allow the EFA to confirm budgets for academies, by March 2013.

Schools will be anticipating confirmation of the budgets as the first true test. The government has acknowledged that new local formulae may alter budget share. To ensure stability, it has therefore promised a ‘minimum funding guarantee’ of -1.5 per cent per pupil for 2013–14 and 2014–15.

This is the first stage, albeit it a key one, in a longer journey towards funding reform, which should culminate in a national funding formula.

The next step is for the government to legislate. Draft regulations are expected soon.