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Following is a question by the Hon Ronny Tong and a written reply by the Secretary for Education, Mr Eddie Ng Hak-kim, in the Legislative Council today (February 27):
Question:
Report No.55 of the Director of Audit released in 2010 uncovered the malpractices and irregularities in the governance and administration of individual Direct Subsidy Scheme schools (DSS schools). For instance, a school had invested its surplus funds of more than $70 million in financial instruments, which was not in line with the relevant guidelines and another school had purchased three properties by using non-government funds of $10 million. Moreover, 14 schools had obtained approval for school fee increases in 2008-2009 as they projected that their accumulated operating reserves in that year were insufficient to meet two months' operating expenses. Yet, among them, the actual accumulated operating reserves of 11 schools turned out to have far exceeded their projected figures (with the actual reserves of eight schools doubling their projected figures). Two years have elapsed since then, and it has been recently reported that there is no improvement in the messy situation about the accounts of DSS schools. In addition, although the Education Bureau (EDB) requires DSS schools to upload, by end of November this year, information on their major expenditure items and operating reserves (financial information) to their web sites, it has been reported that to date, only half of the DSS schools have done so. In this connection, will the Government inform this Council:
(a) of the respective numbers of DSS schools to which funding had been provided by EDB in each of the past 10 years, and the total amounts of funding;
(b) whether EDB will impose penalty on those DSS schools which do not comply with the requirement of uploading their financial information to the schools' web sites after the deadline; if it will, of the details; if not, the reasons for that, and how EDB will ensure that such measure will not exist in name only;
(c) whether EDB will consider requiring DSS schools, when uploading their financial information to their web sites, to list in detail the actual amounts of various items of revenue and expenditure instead of their percentages in the total amounts, so as to increase transparency and enable monitoring by the public; if it will not, of the reasons for that;
(d) given that the Audit Commission found that a DSS school had placed its operating reserves in speculative investments, which is not in line with the relevant guidelines, whether EDB had uncovered similar cases in the past 10 years; if it had, of the number of such cases as well as the names of the schools involved, amounts of money involved and the investment items; if not, the reasons for that;
(e) given that the Audit Commission found that a DSS school had purchased properties in a way which was not in line with the relevant guidelines, whether EDB had uncovered similar cases in the past 10 years; if it had, of the number of such cases, the names of the schools involved, the amounts of money involved as well as the types and uses of the properties concerned; if not, the reasons for that;
(f) given that the Audit Commission found that some DSS schools had underestimated the amounts of their operating reserves when applying for school fee increases, whether EDB had uncovered similar cases in the past 10 years; if it had, of the details; if not, the reasons for that; and
(g) given that EDB has announced a new requirement on the 14th of this month that if the accumulated operating reserve of a DSS school in the 2013-2014 school year exceeds 12 months' operating expenditure, the school should include a proposal setting out how the excessive reserve will be handled (e.g. to reduce school fees) in its audited accounts for the 2013-2014 school year to be submitted to EDB by end of March 2015, whether EDB had, in the past two years, found any DSS school with accumulated operating reserve exceeding 12 months' operating expenditure; if it had, of the number of such schools, and among them, the number of schools which had reduced their school fees afterwards?
Reply:
President,
In response to the release of the Report No.55 of the Director of Audit and the recommendations put forward in the Report No.55 of the Public Accounts Committee, EDB set up the Working Group on DSS (Working Group), chaired by the Permanent Secretary for Education, in February 2011. The task was to review and make recommendations for improving the administration of the DSS as well as DSS schools' governance and administration.
The Working Group held the view that the policy objective of the DSS, i.e. enhancing parental choice and enriching our education system through increasing the diversity in our school system should continue to be maintained. In respect of monitoring the DSS schools, the Working Group was of the view that the relevant work should be complemented by DSS schools' own governance and internal accountability. The Secretary for Education also accepted the Working Group's recommendations that covered five aspects, namely, fee remission/ scholarship schemes, governance and internal control, financial management, training for school personnel, and measures to ensure schools' compliance with DSS requirements. Details of the recommendations were provided in the Paper titled "Improvement measures to the administration and governance of Direct Subsidy Scheme (DSS) Schools" submitted to the Panel on Education of the Legislative Council on April 20, 2012 by EDB.
EDB is now implementing the Working Group's recommendations gradually. Measures which have already been implemented include enhancing transparency of fee remission/scholarship schemes, disclosing school managers information, trial use of the self-evaluation checklist, compiling a list of essential items for annual discussion by the School Management Committees (SMC)/ Incorporated Management Committees (IMC), revising the existing guidelines for investment and purchase of properties and strengthening the existing mechanism to handle school malpractices. Besides, in the annual school fee revision exercise, DSS schools are now required to provide parents, in the consultation process, with appropriate financial information of the schools, including the accumulated surplus, justifications for fee increase, additional resources required, etc so as to ensure that parents have sufficient information to determine whether they would support schools' fee revision plans.
Measures which are going to be implemented include: DSS schools are required to record the delineated reserves in their audited accounts as from the 2011/12 school year; with effect from the 2012/13 school year, schools are required to upload the School Report with financial information onto school's website within three months after the end of the school year (i.e. before the end of November 2013); starting from 2013/14 school year, schools with operating reserve exceeding 12 months' operating expenses will be required to indicate their option to handle the surplus in the excess of the reserve ceiling when they submit their 2013/14 audited accounts to EDB on or before the end of March 2015; schools will be required to set up a governance review sub-committee on or before the 2013/14 school year. Besides, in order to ensure prudent use of funds and other resource such as human resource in DSS schools, EDB will replace the existing audit inspection of DSS schools with a management and financial audit which will include the management aspect as from the 2014/15 school year.
We provide the following replies to the questions:
(a) The Government provides DSS schools with a block grant of recurrent subsidies on the basis of the average unit cost of an aided school place of the respective level. The recurrent subsidies disbursed to DSS Schools by EDB in the past 10 years are tabulated below:
Financial Recurrent Subsidy Number of
Year (Million Dollars) DSS Schools
2002-03 926 40
2003-04 1078 52
2004-05 1218 56
2005-06 1368 62
2006-07 1543 73
2007-08 1740 75
2008-09 2092 80
2009-10 2404 81
2010-11 2588 83
2011-12 2840 84
(b) For enhancement of accountability and transparency of management, schools have to upload their School Development Plans, Annual School Plans and School Reports with financial information on their websites. If DSS schools are discovered to have failed to observe the requirements for preparing the financial information or uploading the School Reports onto their school websites, EDB will require the schools concerned to rectify as soon as possible.
To strengthen the existing mechanism to handle school malpractices, EDB issued the Education Bureau Circular No.7/2012 in July 2012 to inform DSS schools that EDB would implement the following measures from the 2012/13 school year onwards:
(i) If a school fails to comply with a rule or rectify a malpractice within a given time-frame after the school is served an advisory/ warning letter, EDB will bring the non-compliance or malpractice to the attention of the school's supervisor and/ or the SMC/ IMC members at the earliest opportunity; and
(ii) If the non-compliance and malpractice persists after exhaustion of the steps in (i) above, EDB will, depending on the nature of the case and the school's financial situation, post the non-compliance or malpractice with the name of the school concerned onto EDB's website for public information and/ or withholding part of the DSS subsidy of the school until rectification is made. Before withholding the school's DSS subsidy, EDB will carefully assess its financial situation in order to ensure that the interests of its students will not be affected.
(c) The student enrolment, fees levels, services provided and expenses of each DSS school are different. Take a secondary school operating 30 classes and another secondary school operating 18 classes with similar school fees level as an example, the annual expenditure of the former can reach 60 million dollars while that of the latter is around 40 million dollars. From another perspective, for a school charging higher fees and another school charging lower fees with a similar class structure, it would be hard to compare the relative proportions of their income and expenditure if they are reported in actual amount. Therefore, the Working Group recommended and EDB also accepted that DSS schools should report their expenditure items etc in terms of percentages. This would allow the stakeholders to monitor the schools' financial situations more effectively. As such, EDB issued the Education Bureau Circular No.17/2012 in August 2012 informing DSS schools that as from the 2012/13 school year they will have to report the following financial information in the School Report and upload it onto the school website after the end of the school year (e.g. before the end of November 2013 for the 2012/13 school year):
(i) major expenditures (including staff remuneration, fee remission/ scholarship, learning and teaching resources, etc) in terms of percentages of their annual overall expenditures; and
(ii) the cumulative operating reserve in terms of equivalent months of operating expenditure.
(d) All along, any form of speculative investment (e.g. local equities) by schools is not recommended because of the risk of financial loss. Nevertheless, DSS schools may still use non-government funds to invest if they have compelling and well-justified reasons. Before making investment, schools should go through proper procedures. First, they are required to consult major school stakeholders and acquire prior approval from their sponsoring bodies (SSB) and SMC/ IMC. They are then required to devise and strictly follow a school-based investment mechanism for making investment. In the past, EDB did not collect such details in a systematic way, thus being unable to provide relevant details of the past 10 years. According to EDB's record, the DSS school having been discovered during EDB's audit inspection and also mentioned in the Report No.55 of the Director of Audit to have invested part of its non-government funds in financial instruments had already disposed of all the local equities and investment funds in March 2012.
To ensure DSS schools' financial stability after investment, EDB issued the Education Bureau Circular No.17/2012 in August 2012 requiring schools to closely observe the new guidelines for investment recommended by the Working Group as from the 2012/13 school year. The revised guidelines include:
(i) DSS schools are not allowed to use the funds in the operating reserve or the fee remission/scholarship reserve for investment;
(ii) DSS schools have to seek their SMC/ IMC's approval before making investment decisions and such approval and factors for consideration must be clearly documented;
(iii) the only funds that may be used for investment are the long service payment reserve, the reserve for donations with specific purposes and the reserve for construction, maintenance and upgrading of above-standard facilities; and
(iv) DSS schools are only allowed to invest in (1) Hong Kong (HK) dollar bonds, or (2) HK dollar certificates of deposits according to the prescribed criteria/ conditions set by EDB.
(e) Purchase of properties by DSS schools is discouraged as it carries substantial financial implications and the risk of financial loss. Nevertheless, if DSS schools have compelling and well-justified reasons for purchasing properties and prior approval from SSB and SMC/ IMC has been sought, they may still use their non-government funds to do so. In the past, EDB did not collect such details in a systematic way, thus being unable to provide relevant details of the past 10 years. According to EDB's record, the DSS school having been discovered during EDB's audit inspection and also mentioned in the Report No.55 of the Director of Audit to have purchased properties had already vested the three properties concerned to the SMC, two of which are still being used as dormitories for overseas teachers. The SMC is handling the remaining property, including consideration of sale of the property.
To ensure DSS schools' financial stability after purchase of properties, EDB issued the Education Bureau Circular No.17/2012 in August 2012 requiring schools to closely observe the existing guidelines together with the following two new requirements recommended by the Working Group when purchasing properties as from the 2012/13 school year:
(i) DSS schools are required to keep at least an amount equivalent to six months' operating expenditure in cash after the purchase of properties; and
(ii) DSS schools are not allowed to purchase properties through mortgages or any other borrowing arrangements.
(f) DSS schools are required to submit the audited accounts to EDB annually to report on their financial situations including the information of the schools' operating reserve. At the beginning of the second term of each school year, DSS schools need to submit their applications for fee revision for the next school year together with the budget, i.e. about 16 months before the actual operating reserve is concluded (for example, in the 2012/13 school year, most of the DSS schools prepared the budget in April 2012; there would be a time gap of 16 months when schools conclude the actual operating reserve for 2012/13 on August 31, 2013). Also, the projected DSS unit subsidy rate adopted for compiling the budget would usually be different from the finalised DSS unit subsidy rate adopted for concluding the actual operating reserve.
Nevertheless, apart from considering the budget submitted by the schools, EDB also implements a basket of monitoring measures in order to ensure that the school fees collected by DSS schools are reasonable. To process DSS schools' fee increase applications, EDB would require schools to conduct parent consultations, to provide parents with relevant information on schools' financial situations, to explain to them the reasons for fee increase in details and to address their concerns. All these aim at enhancing the transparency and accountability in respect of collection of fees and financial status of the schools. When assessing the applications for fee revision of DSS schools, EDB will consider different factors carefully, including the financial situations of the schools (such as the schools' operating reserve, the revised budget for the respective year and the budget for the next school year), the procedures of parent consultation, information provided for parents and the justifications for fee increase provided by the schools. Moreover, if there is a substantial difference between the expenditure reflected in the revised budget and the original budget for the respective year, schools are required to submit a written explanation endorsed by the SMC/ IMC to EDB. When assessing the applications for fee increase, EDB would earnestly consider the justifications provided by the schools. Besides, normally schools with an operating reserve exceeding 12 months' operating expenditure would not be allowed to increase school fees unless there are compelling reasons. For example, though there is a large operating reserve reflected in the account, a large portion of it has actually been spent on the school facilities. The net book value of the school facilities is still reflected in the operating reserve as the depreciation of such facilities takes many years.
(g) According to the latest two audited accounts submitted by DSS schools in the last two school years, there are 33 and 24 DSS schools with an operating reserve exceeding 12 months' operating expenditure respectively. Those schools are required to submit a development plan for handling the excess. One school applied for fee reduction in each of the 2011/12 and 2012/13 school years. There were another two DSS schools with no excess of operating reserve applying for fee reduction in the 2011/12 school year.
In fact, when examining the reserves of DSS schools, EDB notes that the operating reserves reflected in the accounts of a number of DSS schools usually include other reserves, such as donations with specific purposes or part of reserves already spent on school facilities. The net book value of school facilities is still reflected in the operating reserve as the depreciation of such facilities takes many years. (There was once a DSS school which, upon the exclusion of the net book value of school facilities, had a large reduction of operating reserve from the equivalence of 14 months' operating expenditure to less than 5 months.)
In view of the above and in response to the recommendation of the Working Group, EDB issued the Education Bureau Circular No.16/2012 setting out the implementation details of the delineation of reserves and the reserve ceiling for the operating reserve of DSS schools. By the end of the 2011/12 school year, DSS schools' accumulated surplus arising from both government and non-government funds would be classified into two categories, namely the operating reserve and the designated reserve. The designated reserve include (1) school fee remission/ scholarship reserve, (2) long service payment reserve, (3) reserve for donations with specific purposes and (4) reserve for constructing, maintaining and upgrading above standard-facilities with a view to facilitating DSS schools' financial management and helping their stakeholders understand the schools' operating reserve situation. After the implementation of the recommendation, EDB can assess the financial situation of the schools more accurately when handling their applications for fee revision.
Ends/Wednesday, February 27, 2013
Issued at HKT 17:12
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