Budgeting challenges for 2022

It feels like we find ourselves in the most difficult year for budgeting ever. There are so many moving parts. It’s really hard to get a handle on what is happening with the finances in the sector. On top of this there are new risks that the sector is facing such as  

• the impact of the war in Ukraine and  
• the movement towards a more sustainable future. 

For many years we have requested the ESFA to provide us with assumptions that they would like us to use when setting our three year budgets. In the absence of such assumptions, the ASCL assumptions have always been useful.  However, there are far more unknowns this year, which means that we expect our clients to deviate far more from the ASCL recommended assumptions than in previous years. 

Energy costs

The biggest issue on people’s minds at the moment is something that was not even really on the radar last year and that is energy costs.

• What inflation do you budget for?
• Do you fix for 1,2 or 3 years? 
• For any new free schools you will have to negotiate a new contract.
• For schools being transferred, the energy company may refuse to novate over the contract.  
• MATs with a negative balance sheet, or an in year deficit may have difficulty getting credit with the energy companies.

The DfE has published some guidance on buying energy here. The guidance tells you that the trust can either use a framework or can use an energy broker.  

If you use a framework then it is a bit of a minefield as there seem to be 5 different frameworks, so don’t expect this to be a quick process. 

There are two key financial issues that you need to consider in respect of the energy crisis: 

1. any trusts with a low level of reserves may find themselves going into a deficit position due to the increase in energy costs. Don’t forget you must tell the ESFA if you are going into a cumulative deficit. 

1. Trusts with immediate end dates for energy contracts may have no alternative but to buy at the current peak prices. 

Even those trusts with reserves may have to make difficult decisions to spend some of their reserves on energy costs rather than educational costs. 

Many trusts would like to invest in more sustainable solutions, but the barrier to this is the capital costs and how they could be met, and at the moment there is no extra money on offer. 

Core income

The Department for Education has helpfully published a Technical Note on Schools’ Costs which sets out the core funding increases. 

For 21/22 this is 3.5%, for 22/23 its 6.8% and for 23/24 its back down to 1.6% so a total of 9.8% over 3 years. The note makes reference to the fact that schools may need to carry forward some of the 22/23 funding forward to 23/24 to cover future costs. So in reality, we may see a bumpy ride in the level of reserves as academies spend in 21/22 and then save some more in 22/23 to be spent in 23/24 

Pensions

Pensions is something we are regularly asked about. Public sector pensions are currently undergoing a revaluation, with potential for changes to employer contributions for  

• support staff (LGPS) in April 2023  
• and teachers (TPS) in April 2024.  

It is very difficult to predict the outcome, especially given the widely different LGPS rates paid by trusts currently. But you should be building your expectation of the changes into your 3 year budget. To get a best estimate on the rates to use in your budgets, you need to keep close to the pension providers and find out directly from them what is happening. 

Catering costs 

We know from talking to the catering contractors that the cost of certain food is skyrocketing due to the situation in Ukraine, eg bread, pasta and flour. You need to understand the contracts with your suppliers and how this is going to impact on the Trust. Are you going to be liable to pick up the higher costs that you might not be able to pass on to parents. The cost of labour is also pushing the catering costs up. 

There is likely to be an increased demand for meals too, due to more pupils being eligible for FSM, so what impact will this have on the contracts you are signed up to. There could be a growing gap between the UIFSM funding and the cost of delivering the meals so this could mean extra costs to be absorbed by the Trust. So its really important that you have a handle on the catering function throughout the trust as you may find that different schools have different contractual arrangements. 

Estates costs 

We already know that estates costs are going up significantly compared to previous year, and in many cases there has already been an overspend on planned projects.  

For trusts in the CIF regime then the risk is an overspend which will probably need to come from revenue funds, and may not have been budgeted for.  

For trusts in the SCA regime it has generally meant that fewer projects can be completed as costs increase. There is also the risk of the supplier going bust such as Midas, which would leave the trust picking up extra costs to complete a project. And we are seeing similar cost increases on other estates costs such as cleaning. Due diligence of your suppliers has never been more important so this is one thing I recommend you take back to your trust to review. 

Assumptions 

When looking at all your key assumptions, the most important point is to stress test them to see what extremes would look like. And also to use realistic assumptions ie what you think is really likely to happen, rather than using a worst case scenario. We find this is what many trust do with funding! 

Falling pupil numbers

The Public Accounts Committee Report - Financial Sustainability of Schools in England  warned that the DfE “does not seem to have a grip on the impact of falling rolls on schools”. It has stated the DfE should carry out an “evidence-based assessment of whether there is enough support for schools whose rolls are falling”, and write to the committee by the end of March 2023.

Whilst the UK population is predicted to increase in total, this is due to net immigration. The underlying population is predicted to fall as deaths exceed births. In the mid-2020s there is predicted to be a peak of children aged 10 and below, but a decrease in the number of teenagers due to lower birth rates around the turn of the millennium, so you need to assess the impact of this national trend on your Trust. 

By the mid-2030s the Government predicts a significant fall in the number of children 10 and under and the sector needs to prepare itself for fewer school places, possibly by as much as 1.2 million.  

If you would like to discuss any issues around budgeting please contact me.