SCHOOLS which build up huge cash reserves face having the money taken away from them by their local authority under fundamental funding changes being announced by ministers next week.

New rules will see schools whose balances exceeded 5 per cent of their total budget being forced to explain themselves to their local education authority.

Only reserves held for specific capital projects would be allowed to be retained. Otherwise, the money would return to the local authority’s budget for all its schools.

Ministers have responded to a campaign, led by the National Association of Schoolmasters Union of Women Teachers, to tackle the issue of large balances, which now add up to more than pound;1 billion.

The move, to take effect from 2004, comes as schools are to be asked for the first time to set three-year budgets in a drive to promote better long-term financial planning.

As The TES went to press ministers were poised to announce long-awaited conclusions on the way councils’ education budgets are calculated, following 10 years of campaigning for a change in the funding formula.

Ministers have given an undertaking that no school will lose out because of the changes so there will be a minimum increase of 2.5 per cent but some will receive much more than this.

In the summer, the Government published a set of four possible options, three of which would have seen poorly-funded councils, mainly in rural areas, lose ground.

But ministers have rejected all four of these alternatives, in the face of 53,000 largely negative responses from councils, schools and parents, and proposed a new calculation. Schools minister David Miliband said this would produce a fairer system than the current model, which was based on census data from 1991.

He said: “The new system is fairer, simpler, more transparent and more up-to-date - it better reflects recent social and population changes in England. Our aim is that similar pupils in different parts of the country are treated in a similar way.”

The area cost adjustment, the calculation by which schools in London and the south-east have traditionally received thousands of pounds extra to reflect high living costs, is expected to be broadened to take in other areas of the country.

Local authorities are also to be encouraged to take a greater account of social deprivation and cost-of-living factors when distributing money to schools.

The settlement will also reflect the simplification of the standards fund. The money given to local authorities to reduce class sizes for five to seven-year-olds to 30 and the grant for nursery education will be included in standard spending assessment.

That means that authorities with relatively little nursery provision and those with the largest infant classes will lose out.

New information from the 2001 census has been used for the calculations.