During 2005 and 2006 ERO investigated schools’ use of operational funding. The findings from these evaluations have been presented in two reports. ERO’s first report, Schools’ Use of Operational Funding, December 2006, was about school income and expenditure, and the processes used by schools to manage their operations grant and other sources of income. This second report focuses on schools’ financial decision‑making. Together both reports give an overall picture of school income and expenditure and the factors that have an impact on financial management in New Zealand schools.
For the purposes of these reports, operational funding is defined as the total income available to a school. It includes the operations grant and each school’s locally raised funds. The operations grant is the money schools receive from the Government to meet their organisational goals and to pay for day-to-day running. It is calculated on the basis of several factors including roll size, the decile
 of the school, the Year level of students and the number of Māori immersion students.
 It does not include funding for teachers’ salaries or major capital works, which are funded separately.
The first evaluation found that many different factors influenced the way schools used the money they received from the Government, including:
- the amount of local funds they raised;
- the overhead costs associated with running schools;
- the amount of targeted funding for education achievement (TFEA)
 some schools received as part of their operations grant;
- community expectations; and
- their access to financial and strategic capability.
ERO found most schools had satisfactory financial systems and were in a satisfactory financial position. However, while the day-to-day running of schools was being managed efficiently, the links between financial and strategic planning and boards’ knowledge of student needs - gained through student assessment and evaluation information - were weak. As a result, a board’s knowledge of student achievement often did not drive its financial decision-making.
This second evaluation builds on these findings by describing how some school boards and managers make financial decisions. It describes examples of good practice but, at the same time, also identifies some of the financial challenges and risks facing these same schools, and how these risks are being managed. The information in this report will help school managers and trustees to review and improve the processes they use to make decisions about spending their operational funding. The report highlights the value of having accurate information about student achievement when trustees and school managers make such decisions.
School financial decision-making
As self-governing entities, schools have the freedom to decide how they use their operational funding to meet government, community and school goals. Boards of trustees and school managers are responsible for their schools’ spending in relation to their day-to-day running costs and achieving their charter goals.
Schools need robust processes for selecting, prioritising and evaluating areas for expenditure, so their operational funding is spent in the most effective way. School managers and trustees are often faced with difficult choices. Sometimes different groups of people, such as parents and teachers, may have differing priorities. Ideally schools should base their selection of projects on what they know about their students and their achievements, and prioritise spending on what is most likely to benefit the students.
Schools’ financial decision-makers also need to anticipate and manage internal and external factors that may affect the financial stability of their school. These factors include changes in school rolls, reduction in locally raised funds, staff changes and increased overhead costs. They can have a significant impact on the amount of money schools have to spend on projects aimed at promoting student achievement.
 The decile is calculated from census data and is based on the social and economic characteristics of a school’s community. The lowest socio-economic ranked school has a decile ranking of 1, while a school from the highest socio-economic community has a decile ranking of 10. For the purposes of this report schools are grouped into one of three decile categories: low (decile 1-3), medium (decile 4-7) and high (8‑10).
 See Appendix 1.
 See Appendix 1.