Scotland’s colleges, now reclassified as public bodies, are considering setting up charitable foundations to hold their reserves. This offers financial flexibility but creates governance, stewardship and independence issues
In April 2014 Scottish colleges officially became public sector bodies. This presents some benefits but also throws up some real challenges, particularly in the area of financial management. Colleges have been used to holding on to their financial reserves and using any cumulative surpluses to improve or expand infrastructure and services.
However, public bodies are not allowed to use reserves in this way. Colleges can no longer report deficits in any given year. So, how do they ensure that surplus income still benefits the college, supporting longer-term planning and strategic projects?
One novel solution is for colleges to set up, or combine with other colleges, in an arm’s length charitable foundation that could be used to hold reserves balances and any future surpluses. Colleges would ‘donate’ their surplus income to the foundation specifically set up to deliver benefits aligned with the college’s aims and objectives. Funds would then be returned to colleges at appropriate times.
Given that the foundation would have to be independent, can Scottish colleges be confident that they will have the freedom to spend their own money as they see fit, or will the independent trustees have more control over spending? How does such a focused, single-issue charitable foundation set up by the college retain its independence?
A combined or multi-college foundation may be more independent of individual colleges but control over where funds are directed is arguably significantly reduced. Further, colleges will have to make repeated grant applications to their own charitable foundation – 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 still to reveal themselves in practice. Key issues include:
- 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 is the foundation administered and supported? Overreliance on colleges for this could be another indicator of 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 indicate this.
- 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? 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 current circumstances) for colleges to retain the benefits of longer-term financial flexibility. However, in solving one problem (funding/financial reporting constraints) they create another (governance, stewardship and independence issues). Colleges and foundations must work effectively 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 on college students.
David Eardley is senior manager at Scott-Moncrieff
