Just before Christmas an eight-page document appeared on educational establishment desks. Modestly described as a briefing document, it marked the latest salvo in the low-key but increasingly important battle over school funding.

The title, Local Education Authorities and School Funding, was dull enough. It was the sub-title that hinted at the agenda: Education budgets and how to get more funds to schools.

The document came from the Centre for British Teachers, better known as CFBT Education Services, and circulated among anyone with an interest in local government finance from the Audit Commission to the Local Government Association. CFBT Education Services is the largest private contractor working in the school inspections field.

The paper’s thesis is simple: despite local management of schools, local authorities hold back wildly varying sums of money from schools, thanks to complex accounting procedures which make a mockery of any claim of democratic accountability.

CFBT is blunt about its reasons for mounting the argument - “Heads cannot buy our services if they haven’t got any money to buy them with,” chief executive Neil McIntosh says. But that is not a reason to dismiss the paper. If there is a consensus on anything in education it is that school funding - indeed all local government funding - must change. And with the revelation last week of the Department for Education and Employment paper outlining the reform of LMS, that change looks on the cards.

The DFEE document puts some flesh on what Stephen Byers said to local authority education officers last month. The school standards minister hinted that the Government wanted funding to follow the “grant-maintained model” by delegating more money to schools.

It sets out those services which currently lie with the local authority by law and those which authorities have discretion to hand over to schools - services like school meals. It suggests which may remain with the authority and which should be delegated.

Funding for music, meals, advice and inspection, all staff costs and building maintenance and some local authority initiatives would go to the schools. Special needs, educational welfare and psychology, capital programmes and school transport would stay with the authority.

That should go some way to clearing the “funding fog” which has befuddled school finance since the introduction of LMS in the late 1980s - if not earlier. But it may not end all the arguments.

It won’t address the way money gets to local authorities in the first place - the Standard Spending Assessment which forms the basis of every council’s budget. That is the work of John Prescott’s Department of the Environment, Transport and the Regions which is proving reluctant to consider major change.

And it won’t answer some of the bigger questions the funding debate has raised - are local authorities the best way to get money to schools? Should they be anything more than light-touch co-ordinating bodies? Should they exist at all? Those questions are being asked increasingly noisily by people on all sides.

The SSA has been contentious ever since it was introduced alongside the poll tax in 1990 - this year almost 100 authorities sent delegations to Whitehall to protest about their figure. It’s the vagaries of the SSA which allow Staffordshire’s education chiefs to celebrate an apparent funding increase while the parents of Shropshire take to the streets of London in protest.

The phrase the “funding fog” was coined by the teachers’ pay review body in 1993 and the annual rows over salaries exemplify it perfectly. Every year local authority leaders - back in 1992 it was Stephen Byers - complain the rise is not being funded fully. And each year ministers - like Mr Byers in 1997 - say the money is there and warn authorities not to squander it on other services.

This year, more than ever, there is a feeling that local authorities are on trial as they draw up their spending plans. The Government is still reluctant to direct local authority spending. Any moves to do so would be fiercely resisted by councils who say their freedom to decide how to spend the money is an essential part of local democracy.

Which brings us back to CFBT’s argument - as Neil McIntosh says: “It can’t be accountable if people don’t understand it.”

Authorities must delegate at least 85 per cent of what is called their potential schools budget. But money can be “top-sliced” - diverted to other services or central administration - in several ways (see graphic). That leads to the wide disparity that Government figures suggest exists in the amount of “hold-back”.

Money is first set aside for “service strategy and regulation” - roughly defined, the kind of planning and regulatory work a local authority must do even if all its schools opt out.

Mr Byers this week drew attention to huge variations in SSR between councils - often caused by widely different interpretations of what it should include.

Government figures show Knowsley’s SSR claims 3.9 per cent of its education budget this year while South Tyneside’s is 0.1 per cent. Essex spends Pounds 6.4m while similar-sized Nottinghamshire spends only Pounds 2.3m. Announcing a “full investigation,” Mr Byers said: “There needs to be a clearer and tighter definition of administrative costs.”

Mandatory services like building work are then deducted along with services such as school meals and transport which could be delegated but which councils can choose to retain. And all this before reaching the potential schools budget.

In total, English authorities this year spent 25.6 per cent of their general schools budget centrally - ranging from 18 per cent (Richmond) to 37 per cent (Wakefield). CFBT hired accountants Deloitte and Touche to work out how much authorities were holding back. It found Greenwich was retaining Pounds 723 per pupil in 199596 compared to Pounds 1,414 across the river in Tower Hamlets - and only Pounds 499 in Hereford and Worcester.

The DFEE’s funding proposals will end some of those variations. But there is some scepticism over whether it will actually improve school funding. Tony Travers, local government expert at the London School of Economics, argues that the fact that money is held centrally and figures are impossible to comprehend doesn’t mean there is a stack of cash waiting to be liberated. “We just don’t know,” he says.

The Audit Commission should be able to help - in one of the first major studies of its kind it is analysing how money is spent by authorities. Early findings suggest the amount spent centrally which doesn’t actually find its way into schools is smaller than some critics may think. In other words, more delegation won’t necessarily give schools much more money, just more say over how it is spent.

And heads may not always want that say. David Hart, general secretary of the National Association of Head Teachers, says his members want more delegation in most areas but “they don’t want transport under any circumstances, or school meals”. Under Labour’s proposals they would get one but not the other.

The Local Government Association, keen to preserve some control while going along with the Government’s general drift, would prefer to see local agreement on which services are delegated.

“Instead of arguing about whether delegation should be 85 per cent or 95 per cent it should be based on service: ask schools if they want something like music delegated, provided by an arm’s length service or done privately, ” LGA education chairman Graham Lane says.

If the Government’s proposals do not do enough to create a more transparent system, calls for a national funding formula for schools are likely to grow. But if the funding fog cleared, schools would have only one place to point the blame - the Government. It will be a brave Education Secretary who bites that bullet.

* VOICES THAT CARRY INFLUENCE

THE PRIVATE SECTOR

Firms like CFBT, Nord Anglia and Capita have already made in-roads into state education in areas like teacher supply, inspections and administrative support. But they are keen for a bigger share of the cake, which the new education action zones may give them.

CFBT, which has put together an action zone bid with Lambeth, London, sees some co-ordinating role for the LEA but argues most services can be delegated to schools.

THE IDEOLOGUES

Free-marketeers such as Lord Skidelsky’s Social Market Foundation have argued for the effective privatisation of education; the debate was taken forward last year by Towards Self-governing Schools, written by former Birmingham education officer Dick Atkinson and published by the right-wing Institute of Economic Affairs.

Atkinson argued for schools to be funded under a national formula, leaving town halls with a vestigial light-touch “enabling and visionary” role. Even that does not go far enough for the IEA’s director of training, James Tooley, who advocates the abolition of authorities.

THE PUNDITS

Some education commentators are voicing increasingly strong views on the role of the LEA. Chief among them is perhaps The Observer’s Melanie Phillips, who suggested in November that “the deeper question that must now be asked is whether education authorities should exist at all”. Phillips is an ally of Chris Woodhead, the chief inspector of schools.

THE INSPECTOR

Chris Woodhead is sceptical of the “LEA effect”, believing that school improvement lies in the hands of the teachers. Rumblings are already starting to be heard from authorities being inspected by OFSTED - last week OFSTED’s final report on Birmingham had to be toned down.

THE AUDITORS

The Audit Commission has begun to focus on education authorities with a series of reports which began last week with Changing Places. That takes the Government’s profession of support for local government at its word and suggests a constructive agenda.

That is not to say the commission will not be critical. A more detailed, evidence-based report this summer will be the first real exploration of how councils hold back money. The commission joins OFSTED in inspecting LEAs; relations are not always easy.

THE POLITICIANS

So where will Labour go? Prime Minister Tony Blair sees a more enabling role for local authorities, and Stephen Byers has told LEAs they do not have a “God-given right” to run education. But they are planning a root-and-branch reform or just tinkering?

The prevailing view is that they are being pragmatic and seeking a range of options which can be adapted to different situations. A cynical minority suspects that between zones, national literacy schemes, OFSTED and the rest they are creating an alternative education system to replace LEAs wholesale when the time is right.