11 September 2014

Scotland: foundations, finance and FE

Earlier this year, Scottish colleges officially became public sector bodies. This switch presents both benefits and challenges.

Earlier this year, Scottish colleges officially became public sector bodies. This switch presents some benefits for these institutions. However, it also throws up some real challenges, particularly in the complex area of financial management.

Colleges have long been used to holding on to their financial reserves, using any cumulative surpluses to improve or expand college infrastructure and services. This system seems to have served them well up to this point. Decisions could be taken with a longer term outlook, based on the established principle of saving up for the future.

However, public bodies are not allowed to use reserves in this way. Colleges can no longer report deficits in any given year without breaching their targets. So, how does the college sector safeguard surplus income, ensuring that this money still benefits the college and supports longer-term planning and delivery of strategic projects? This is the big issue for Scottish colleges. There are ways to tackle this, but it’s still early days in delivering the solution.

One novel solution is for colleges to set up, or combine with other colleges to set up, an arm’s length charitable foundation. This would be used to hold reserve balances and any future surpluses. Colleges would then ‘donate’ their surplus income to the foundation, which has objectives aligned with the college’s own aims. Funds would then be ‘paid out’ to colleges at appropriate times.

However, given that the foundation would have to be independent, can Scottish colleges be completely confident that they will have the freedom to spend (what was) their money as they would like? The foundation’s trustees need to exercise their own control over its spending. How does such a focused, single-issue charitable foundation set up by the college retain the required level of independence? A combined or multi-college foundation may be more able to demonstrate independence from individual colleges, but control over funds is arguably significantly reduced in this way. Further, colleges will have to make repeated grant applications to their own charitable foundation, to access what was previously their own money – is this a good use of time and resources?

There are a number of ways to make this work most effectively, but there is still a lack of clarity in the sector. The full implications and mechanics of these arrangements have yet to reveal themselves in practice.

If college staff or board members represent a majority or significant minority of foundation trustees, there is a risk of full or proportionate consolidation in college financial statements. This negates the objective of the foundation.

How will the foundation be administered and supported? Over-reliance on college resources could be another indicator of functional control and lack of independence.

Do any terms and conditions accompanying the gifting of funds from the college to the foundation indicate the arrangement isn’t sufficiently arm’s length? Any retention/exclusion clauses or other limiting qualifications could do so.

How can the college demonstrate an accounting obligation, as at the balance sheet date, to the foundation for the surplus funds? And how can it not over-commit funds when it is unsure of its final, audited surplus? A results-contingent pre-year end statement by the college creating this obligation will mitigate this risk. (This situation is also exacerbated by those colleges that now have a 31 March financial year end date, but an effective 31 July operational and academic year end).

Are there clear, transparent and well-documented processes for colleges to apply for and secure funds from the foundation? To what extent is this being demonstrably followed in all instances? Over time, it might be easy to lapse into a more casual arrangement where something as simple as incomplete paperwork or poorly-worded documentation could indicate insufficient independence and result in the need for consolidation.

What is in the foundation’s own financial rules regarding applications from non-college bodies with similar aims and objectives (seeking what were originally college funds)? This impact will depend on the robustness of the foundation’s rules and flexibility to respond to any such circumstances.

Ultimately, foundations appear to be the most workable way, in the current circumstances, for colleges to retain the benefits of longer term financial flexibility.

However, in solving the problem of funding and financial reporting constraints, others are created in terms of governance, stewardship and independence. Colleges and foundations must work effectively, and it might be said, creatively, to mitigate the risks set out above.

Interestingly, amongst all these uncertainties, challenges and related effort, there seems to be little evidence to demonstrate the net benefit (or otherwise) of all these changes for the students the sector serves.

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