Latest Government figures show that more than Pounds 609 million was held in school bank accounts, but many heads say they have no savings at all.

The issue has become contentious in the run up to the announcement of the teachers’ pay award because schools are to be expected to make up the shortfall between the amount councils provide and the actual recommendation - thought to be of the order of 2.9 per cent. A TES survey (January 20) has shown that half of councils have budgeted for a 2 per cent or less increase.

John Gummer, the Environment Secretary responsible for local government finance, has called for a re-think of the formula for local management of schools (LMS) after being told that the current system of paying schools on the basis of average rather than actual teacher salaries penalised schools with more experienced staff and that such schools would be crippled by the pay award because they have no savings.

The subject was raised earlier this month at a meeting of the Consultative Council on Local Government Finance, between representatives from the local authority associations and the Departments of Environment and Education.

Robin Squire, Education Under Secretary, also conceded that a review may be necessary but pointed out that one of LMS’s consequences was to put governors in the hot seat about choices of staff.

The issue was sparked by Ron Watson, a Conservative member of the Association of Metropolitan Authorities from Sefton, who said councils could not take into account the savings of schools - in some cases larger than the authority’s - when setting their education budgets because they were not evenly distributed.

While some schools could comfortably finance a pay increase of 2.9 per cent from their own coffers, others had no money at all.

The School Teachers’ Review Body which will recommend the teachers’ pay award next month has also taken an interest in the figures on school balances. In her letter to the STRB, Gillian Shephard in November stressed the need for affordability saying that in practice local authorities will have only a 0.5 per cent increase to contribute. But when MPs in the House of Commons this week warned her of an impending crisis in schools, caused by the local government settlement, Mrs Shephard drew their attention to an Audit Commission report which said Pounds 0.5 billion was held in individual school budgets at the end of the last financial year.

Newer Government figures published this week reveal that schools in Lancashire have built up almost Pounds 33 million in reserves, Hampshire schools have Pounds 25.5 million in their bank accounts, Avon Pounds 19.6 million, Hertfordshire Pounds 20.4 million and Birmingham and Cheshire both more than Pounds 16 million.

A spokeswoman from Hampshire said that virtually all the money in reserve was earmarked for specific projects and indeed one out of 13 schools in the county was working in a deficit.

In Warwickshire, where schools have reserves of more than Pounds 7 million, it is estimated that between 140 and 200 teachers jobs are likely to be lost because some schools will not be able to afford the pay rise. The Pounds 7 million will help only a third of the county’s 300 schools with the rest having either none or modest savings.

Last November, the National Association of Schoolmasters and Union of Women Teachers published a survey which suggested that more than Pounds 812 million is languishing in school bank accounts in England and Wales. The average balance, according to NASUWT figures, is Pounds 72,000 for a secondary school and Pounds 22,000 for a primary school.

In Norfolk, where Gillian Shephard has her constituency, parents have condemned as “immoral” the Government’s refusal to fund the teachers’ pay rise and in a letter to her said: “Parents are becoming more and more pressured into providing not only the icing on the cake but the ingredients.”