The invasion of Ukraine by Russia in early 2022 led to a rapid and significant increase in energy costs for individuals and businesses alike in the UK as well as further afield. UK schools and Multi-Academy Trusts (MATs) were not exempt, and they have to fund these substantial increased energy costs from their GAG funding provided by the Department for Education (DfE).
However, those schools who entered into fixed rate/term energy supply contracts before the current significant cost increase are only affected when the fixed term ends. Even so, there are many schools and MATs who have already been detrimentally affected as their energy supply contract came up for renewal resulting in a significant multiplier increase on energy costs when compared to what was previously being paid by the school or MAT for gas and electric.
Further cost increases have also been incurred by each school and MAT through paying the 2022/23 national pay award for school support staff from April 2022. This was a flat rate increase of £1,925 that equated to 4.04% to 10.5% dependent upon the pay spine that applied to each employee. In addition, schools and MATs have also funded the final pay 2022/23 award for teaching staff, although the DfE provided some additional funding to cover these costs. However, the same cannot be said for any 2023/24 pay awards for teaching and non-teaching staff as the DfE have indicated MATs and schools will need to fund these latest pay increases from existing budgets and reserves in a number of cases. Whatever annual pay award is agreed for teaching and non-teaching staff, it is will apply from April 2023.
In recognition of the significant increased cost pressures faced by schools and MATs, the DfE announced that an additional £1.2 billion of additional funding for 2022/23 year and £4.7 billion in core funding for schools and MATs in 2024/25. All additional DfE funding will help alleviate the increased costs that schools and MATs have to incur, be that increased teaching and non-teaching staff costs and increased energy costs.
However, a school’s revenue is predominantly determined by the number of pupils on role, and the annual intake of pupil numbers at a school cannot suddenly be increased to address these increased costs i.e. a school cannot suddenly turn on the pupil revenue stream tap and take on additional pupils.
As a result, each school and MAT will individually need to determine whether the increased level of DfE funding actually addresses their own unique cost increases in the current 2023/24 year but also in their 3 year projection of costs and revenues. To some extent, a school’s financial assessment outcome may well come down to the luck of a school or MAT as determined by when the energy supply contract is renewed, particularly as we have seen gas prices falling recently as new supply streams have come on stream. Consequently, any school or MAT signing a new energy supply contract at the moment may well reap the timing benefit of these lower energy prices. Furthermore, those schools and MATs with energy contracts that go into 2024 and beyond may get the benefit of increased energy supplies from other sources. Any increased supply, or reduced demand) will help reduce energy costs in the medium term as market forces apply and increased energy supplies are provided to the UK.
Turning off the heating and lighting when a school is open is not an option. Therefore, each school and MAT has no other choice but to pay the current energy costs, whatever these may be. However, each school or MAT can decide whether to go with variable or fixed energy pricing. Variable pricing leaves it open to market forces which are beneficial if prices are reducing or going with a fixed pricing structure with the known cost. However, the various energy options puts each school or MAT in an impossible position where they are caught between a rock and a hard place.
No one could have predicted such a large increase in energy costs, but reality dictates that a large portion of the DfE increased budget will need to be allocated by a school or MAT to cover the significant increase in their energy costs. Money can only be spent once, and allocating this to meeting the increased energy means that it cannot be spent on increased teaching and non-teaching staff resources that would help deliver improved pupil outcomes.
Despite this, every school and MAT has to set a balanced budget on an annual basis to comply with the ESFA rules. However, it is recommended that each school and MAT should also project the budget forward for another 3 years based upon anticipated costs and revenues. This 3 year approach helps provide for a full and improved understanding of the current financial position, but also the impact of pay increases and energy costs on the projected financial position in a few years’ time.
So how does a school or MAT balance the budget?
Each school or MAT in mid-2023 should create an initial budget for 2023/24 that includes the known or projected increased energy costs and the projected staff costs based upon best estimates available at that time the budget is created. It is the accuracy of these budget estimates, and the 3 year projection, that determines how big a funding deficit, if any, there is to be filled, whether it is just for the current year and whether the projected funding deficit is progressively getting worse.
Whatever approach is taken to financial planning, maintaining or improving the pupil outcomes should be paramount, so preserving teaching & learning resources wherever possible should be the number one priority. Therefore, if cost savings are required to balance the current year’s budget, a school or MAT should consider selecting cost savings options that minimise the impact on teaching & learning whilst delivering the financial savings required.
One initial starting point for any school or MAT looking at the next year’s funding is to look at what reserves are available that have been built up over previous years, as these reserves can be used to fund these additional costs in the current year’s budget. However, some, or all of these reserves may well have been created to pay for a specific future major capital expenditure projects such as replacing an old boiler. However, reserves, like any other funding, can only be spent once. So if reserves are used to fund this year’s deficit, each school or MAT would then need to look very carefully at how these reserves can be re-built in subsequent years.
If the use of all of a school’s reserves still results in a negative budget, then other non-staff related costs need to be scrutinised in detail to determine whether each cost item is really, really, needed and whether any of that cost can be deferred to a later financial year. Any fundamental cost-cutting objective is to balance a budget through maximising all the savings from non-staff costs, thereby minimising the impact on non- teaching and teaching staff numbers.
Once all non-staff cost reduction avenues have been explored and identified, and assuming further cost savings are required to balance this year’s budget, both the numbers of non-teaching staff and teaching staff will then need to be reviewed, with some very difficult decisions made on staff numbers.
