Although schools regularly complain they are short of money, few spend every penny they receive during the financial year. At the end of 199495, local authority and grant-maintained schools had total cash balances of more than Pounds 700 million - Pounds 650 million held by LEA schools and nearly Pounds 53 million in the grant-maintained sector.

The Department for Education and Employment, which has yet to produce a detailed breakdown, said most schools had five-figure balances but, in extreme cases, the sums carried forward were far higher or lower.

At the end of 1993-94, the last year for which detailed national figures are available, half of primary schools carried forward Pounds 18,000 or more (equivalent to Pounds 100 per pupil) while half of secondary schools carried forward Pounds 57,000 or more (about Pounds 80 per pupil).

While teachers’ unions and some local authorities have questioned the need for schools to retain large balances, much of the money is saved for long-term projects such as new accommodation or expensive equipment.

Banks, most of which were initially slow to realise the significance of the school account market, are starting to realise that some schools have large sums to invest.

During the summer the Co-op Bank launched a guaranteed investment bond, describing it as an ideal investment opportunity for schools. The bond pays a fixed rate of interest over a period chosen by the investor so that, for example, Pounds 10,000 might be worth Pounds 12,175 after three years.

Bob Young, a senior business development manager at the Co-op and also a school governor, said grant-maintained schools were “masters of their own destiny” and generally had more money at their disposal.

It was unusual for an LEA school to want to invest more than Pounds 5, 000 in one go. “Local authority schools have constraints on their budgets,” he said. “They may not want to tie up their money for two to three years, but they may be looking for a short-term investment of six months.”

The Co-op, which has always worked hard to attract schools, has 5,347 schools with current accounts and 910 with deposit accounts, which pay greater interest. At any time, the balances held by schools may be worth a total of more than Pounds 40 million.

The Yorkshire Bank, which could not reveal its total number of school customers, offers premium savings accounts to schools wishing to invest sums ranging from between Pounds 500 and Pounds 5,000. About 400 schools have opened fixed-term managed accounts which the bank invests on the money markets, which pay higher rates of interest and have average balances worth about Pounds 47,000.

Among the main High Street banks, Lloyds offers schools the opportunity to switch money between a current account and a “business call” account with tiered rates. But it could not give details of the size of balances held by schools or its number of school customers.

NatWest, which offers two years free banking to schools as soon as they obtain grant-maintained status, automatically transfers credit balances into savings accounts. Business managers can help schools gain access to a range of savings options, said a spokesman. Barclays, which is still looking at the feasibility of a schools package, said it had not noticed any great interest in long-term investments among schools.

While all grant-maintained schools must have bank accounts to handle their finances, some LEA schools leave balances with their authority, which normally invests the money with other reserves.

Lancashire, with more than 700 schools, has seen its total school balances fall from Pounds 32.1 million in 199495 to Pounds 25.4 million last year. This was mainly because primaries and secondaries spent more than they were allocated and drew on balances brought forward from the previous year. The majority of schools are in credit and, unless they have their own accounts, are paid interest by the LEA. Last year 26 primary schools had reserves worth more than 25 per cent of their annual budget. Hawthorn Junior School, Blackburn, which has an annual budget of about Pounds 420,000, carried forward more than Pounds 97,000. The headteacher, John Orgill, said the school was using the money as a cushion while pupil numbers fell, but he did not expect to have more than Pounds 30,000 by the end of 199697. He believed the Pounds 7,420 Hawthorn was paid in interest by the council was as good as anything the 300-pupil school could have achieved on the open market. “I have got enough trouble running a school,” he added. “I don’t want to become involved in investing large sums of money.”

John England, financial services manager for Lancashire’s education department, believes the council benefits from effectively borrowing money from schools with positive balances and spending it on other services. Schools with their own bank accounts could invest reserves as they wished providing the investments are risk free, he added.

Twenty-nine primary and 15 secondary schools ended 199596 in deficit and will incur interest on short-term loans from the council. “We tend to concentrate on those in difficulty which need our assistance more.”

LEA schools in Surrey have total balances of just over Pounds 12 million. The council was so concerned about the size of surpluses that it asked all 373 schools how they intend to spend the money they hadaccumulated.

Alan Docksey, head of education financial services, said most were saving for long-term projects or other work, such as decoration. In some cases they were anticipating a future reduction in their budgets.

Most schools have individual accounts within a general schools account negotiated between Surrey and the Midland Bank. “A few of have asked to use a separate investment account,” said Mr Docksey. “They like to be able to demonstrate their independence.”

Studies by the Audit Commission for its “Adding Up The Sums” reports show primary schools are likely to carry forward a larger percentage of their budget each year than are secondaries. “If you are walking along the edge of a cliff there is a tendency to stand a few paces away from it,” said Dermot O’Donovan, a senior manager at the commission.

Although 60 per cent of schools responding to Adding Up The Sums 4 were allocating balances to specific projects, others had no firm ideas on how they would spend their money, he added.

Grant-maintained schools carried forward total reserves of nearly Pounds 92 million at the end of 199495. This sum was made up of nearly Pounds 53 million in public reserves (money received from the Funding Agency for Schools and other government sources) and Pounds 39 million in other reserves (money raised by the schools themselves).

Paul Campbell, senior financial monitoring officer at the FAS, said the sums held by grant-maintained schools were decreasing but some still carrying forward substantial sums for capital projects, including new sixth forms. “Until now grant-maintained schools have not been able to borrow money, but they are making use of the funds they accumulate,” he said.

Grant-maintained schools can invest surpluses in government bonds and long-term savings accounts but, like LEA schools, cannot risk their money on the stockmarket. The FAS discourages schools from carrying forward more than 10 per cent of annual maintenance grant for capital projects or more than 2.5 per cent for general purposes.

Public reserves held by grant-maintained schools at the end of 199494 varied from a few thousand pounds to more than Pounds 825,000, carried forward by Dunraven School in Lambeth. Richard Townsend, head of Dunraven, said the school had built up the large balance after opting out because of the sum which Lambeth had previously held back and the closure of its sixth form, for which it continued to receive funding for a further 12 months.

The money has been invested in a high-interest savings account but is slowly being spent on phased projects, including technology equipment. He did not expect to have more than Pounds 200,000 left over by next March.

“There was a lot of pressure on us to spend the money,” said Mr Townsend. “The temptation was to put it into staffing but we didn’t want to have to cut back again in a few years time.”

Some grant-maintained schools with deficits on their publicly funded monies remain in credit because of their other reserves, but other schools are running at a loss and have been given up to five years to balance their books. Schools with deficits of more than Pounds 100,000 must produce a satisfactory recovery plan for the funding agency. “They have to tell us how they are going to reduce their deficit,” said Paul Campbell. “They don’t just produce figures. They must show usmanagement solutions.”