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					ESF Finance Public Meeting

         Dec 9, 2010
       Bradbury School
           6:30pm

                             0
          Topics to be Covered
•   ESF Accounts
•   School Funding
•   ESF/ESL Relationship
•   Private Independent Schools
•   ESF Centre




                                  1
              ESF Accounts
• ESF prepares annual accounts in
  accordance with Hong Kong Financial
  Reporting Standards and The English
  Schools Foundation Ordinance.
• KPMG, one of the big four global
  accounting firms, is our external auditor
  and they express an opinion on the
  accounts every year.

                                              2
          ESF Accounts (2008-09)
           Income and Expenses
• Major income sources:
  - Tuition fees: $943m (72%)
  - Government grants: $269m (21%)
  - Rental income from quarters and school facilities:
  $53m (4%)
• Major expenses:
   – Salary related expenses: $945m (79%)
   – Depreciation: $86m (7%)
   – Repairs and maintenance: $60m (5%)
   – Other operating expenses: $109m (9%)
                                                         3
            ESF Accounts (2008-09)
             Income and Expense
Balance sheet (Aug 09):

• Assets:      Fixed assets - $806m
               Cash - $346m
• Liabilities: Advance fees - $137m
               Accruals for major repairs - $106m
               Payables - $188m
               Hardship allowance - $35m


                                                    4
          ESF Accounts (2008-09)
                Reserve
Reserve: $735m

ESF’s reserve is created from profit, that is the
accumulation of accounting profits over the
previous years. It represents the theoretical net
value if we sell off all our assets and pay off all our
debts. Hence, it is not the amount of cash ESF
can spend.


                                                      5
                 School Funding
Financial resources for schools:
A funding formula has been used to ensure the fair distribution of
   funding to schools.

Controlled by schools:
  - Staff funding
  - Teaching and Learning Responsibilities Allowance (TLR)
  funding, e.g. Head of Department, Head of Year, etc.
  - Information and Communication Technology (ICT) funding
  - Others

Controlled by ESF Centre
  - Centrally held funding
                                                                 6
               School Funding
Staff Funding

Teaching staff funding:
• a student number-based formula
• target enrolments agreed with each school
• amount determined based on median teacher salary
  (MPG 9), contact time, and curriculum (e.g. IB)
• learning support, English as an Additional Language,
  Chinese, and Higher Education Counselor for secondary
  schools are given additional funding
• surplus from the staff funding budget will be accumulated
  at school level, to be used at school’s discretion, within
  the guidelines set
                                                           7
               School Funding
Support staff funding:
• base funding plus additional amount per student
• some positions such as pool attendants, lab technicians
  and workshop instructors are individually calculated
• Chinese and Learning Support Centre Educational
  Assistants are additional to the formula
• Schools are free to plan their staffing within the budget

Schools can move funds between the teaching and support
  staff budget.

Supply teaching funding:
• for leave of absence and CPD
• calculated as a % of teaching funding                       8
                 School Funding
TLR budget:
• based on size of school
• 4 levels of TLR (primary TLR 2-4, secondary TLR 1-4)
• established models based on student number
• schools are free to assign positions within budget, but no
  more than 50% of teaching staff body can receive TLR

ICT:
• based on a number of factors: number of students, staff,
  departments, senior leadership, and classes


                                                             9
               School Funding
Others:
• Electricity supplement: student number based
• Teachers training fund, e.g. Special IB Diploma teacher
  training fund for secondary schools
• Operating expenses for office supplies, books, etc. -
  student number based

Centrally held funding:
• Summer works
• Major capital works
• Provision of continuing professional development for
  centrally held training
                                                            10
       ESF/ESL Relationship
ESF
• ESF is a statutory body established pursuant to
  the English Schools Foundation Ordinance.
• The main object of ESF is to administer and
  operate, within Hong Kong, schools offering a
  modern liberal education through the medium of
  the English language to boys and girls who are
  able to benefit from such an education.


                                                11
           ESF/ESL Relationship
ESL
• ESL is a company limited by guarantee established
  under the Companies Ordinance.
• ESL is a registered charity and was originally set up to
  provide kindergarten education, language classes and
  extra curricular activities. It also operates the two
  Private Independent Schools.
• The reasons for using such an arrangement are:
   – Tax exemption treatment under section 88 of the
     Inland Revenue Ordinance, and
   – Ring-fencing the PIS schools and kindergartens from
     the subvented ESF schools.
                                                         12
          ESF/ESL Relationship
• The relationship between ESF and ESL was
  reviewed in detail by Mayer Brown JSM and KPMG
  at the request of the ESF Board on 11 May 2010.
• The review considered the relationship from
  operational, legal and accounting perspectives and
  concluded that the current structure is acceptable
  from a risk and control perspective, and that there
  would be no tangible benefit from changing the
  existing arrangements.
• The review opined that ESF has de facto control of
  ESL, making ESL effectively a subsidiary of ESF.

                                                        13
         ESF/ESL Relationship
• ESF and ESL each keeps its own set of financial
  accounts.
• Budgeting process is dealt with separately.
• ESL receives support services from services
  from ESF.
• ESF charges ESL an annual management and
  administration fee for the provision of such
  services. The fee is set at $3.5 million for
  2010/11 and is determined by the proportion of
  time employees at ESF Centre spend on ESL
  matters during the year.
                                                14
       Private Independent Schools
• The Government selected ESF as a qualifying
  sponsoring body in relation to Private Independent
  Schools.
• The applications for the construction of new schools
  under the Hong Kong Government’s Private Independent
  Schools policy was approved by the Government in 2000
  and 2001 respectively.
• In 2000 and 2001, ESF and the Government agreed for
  ESL to take over from ESF the role as the qualified
  sponsoring body to avoid confusion with the part of
  ESF’s activities which was supported by Government
  subvention.

                                                     15
     Private Independent Schools
• Two primary-cum-secondary private independent
  schools, Renaissance College and Discovery College,
  are currently operated by ESL.
• The two schools have a student capacity of 2,100 and
  1,300, and enrolment of 1,872 and 901 respectively.
• The Development and Operating Agreement (DOA)
  between ESF and ESL included the below:
   – ESF builds and owns the school premises and all furniture and
     equipment;
   – ESL undertake to operate and manage each of the schools; and
   – ESF has the right to receive fees from ESL.



                                                                 16
      Private Independent School
Total Capital Costs
HK$
                      Renaissance College     Discovery College           Total

Total Capital Costs
 before subsidy                308,217,221          307,578,881    615,796,102

Less Gov't Subsidy            (197,671,989)        (139,824,973)   (337,496,962)

Total capital costs
 net subsidy                   110,545,232          167,753,908    278,299,140




                                                                                   17
     Private Independent Schools
• The costs of constructing the two schools, net the
  Government grants, are included in the ESF accounts as
  Fixed Assets.
• Based on the DOA, ESL makes a repayment to ESF
  every year. Total repayment received up to 2009-10 is
  $41.6m ($32.5m from Renaissance College; $9.1m from
  Discovery College). In 2010-11, the repayment is set to
  be $15.6m.




• It was agreed that the funds ESF invested into the two
  PIS will be repaid within 20 years, including a 3 month
  HIBOR+1% return.                                          18
     Private Independent Schools
                                                                                              payback     P+I fully
                                Bal b/f + capital
yr              Fixed assets          cost           Interest    DOA Payment        Bal c/f     year     settled in


 1   2006/ 07     217,401,397     217,401,397       11,348,353      (3,908,148)   224,841,602
 2   2007/ 08     243,120,993     250,561,198       10,122,672      (8,645,574)   252,038,296
 3   2008/ 09     273,148,948     282,066,251        6,515,730     (13,498,856)   275,083,126
 4   2009/ 10     278,237,508     280,171,686        3,418,095     (15,561,216)   268,028,564
 5   2010/ 11     283,407,508     273,198,564        4,097,978     (15,561,216)   261,735,327
 6   2011/ 12     288,607,508     266,935,327        5,338,707     (15,561,216)   256,712,817
 7   2012/ 13     288,607,508     256,712,817        5,134,256     (18,911,216)   242,935,858
 8   2013/ 14     288,607,508     242,935,858        4,858,717     (18,911,216)   228,883,359
 9   2014/ 15     288,607,508     228,883,359        6,866,501     (18,911,216)   216,838,644
10   2015/ 16     288,607,508     216,838,644        6,505,159     (18,911,216)   204,432,587
11   2016/ 17     288,607,508     204,432,587        6,132,978     (18,911,216)   191,654,348
12   2017/ 18     288,607,508     191,654,348        7,666,174     (18,911,216)   180,409,306
13   2018/ 19     288,607,508     180,409,306        7,216,372     (18,911,216)   168,714,463
14   2019/ 20     288,607,508     168,714,463        6,748,579     (18,911,216)   156,551,825
15   2020/ 21     288,607,508     156,551,825        7,827,591     (34,891,487)   129,487,930
16   2021/ 22     288,607,508     129,487,930        6,474,396     (35,743,146)   100,219,180 payback
17   2022/ 23     288,607,508     100,219,180        5,010,959     (36,628,872)    68,601,267
18   2023/ 24     288,607,508      68,601,267        3,430,063     (37,550,027)    34,481,304
19   2024/ 25     288,607,508      34,481,304        1,724,065     (38,508,028)    (2,302,659)          fully repaid
20   2025/ 26     288,607,508      (2,302,659)                     (39,504,349)   (41,807,008)

                                                                  (446,851,863)
                                                                                                                       19
   Private Independent Schools
• The tuition fees of the two private
  independent schools are set based on:
  – Market conditions
  – Cost structure
  – Overall profitability of ESL
  – Enrolment numbers




                                          20
                   ESF Centre
ESFC provides the following services to our schools and ESL:

• Education (strategic planning, assessment, reporting,
  continuous professional development, admissions)
• HR management and support (recruitment, contracts,
  remuneration and benefits, systems support)
• Finance (budgeting, reporting, internal control and
  monitoring, billing, payroll, payments, banking,
  procurement, systems support)
• Facilities Development (major repairs and maintenance)
• IT (planning, systems support, data management,
  infrastructure)
• Communications (website management, marketing and
  fundraising, organisation wide communication)
• Internal audit                                           21
                ESF Centre
• Supporting 9 Primary, 5 Secondary, 1 SEN
  schools, 4 kindergartens and 2 PIS.
• Total staff in the organisation, including ESL is
  approximately 2,700.
• End of Sept 2010, ESF Centre has 104 staff
  member, representing 6.2% of total staff
  population in ESF, and 3.8% of total staff
  population including ESL.
• ESF Centre’s staff cost is approximately 4.4% of
  ESF total revenue, and ESF Centre’s costs is
  approximately 6.2% of ESF total revenue.

                                                  22
 Appendix I – Fees Comparison (Primary Schools)




Note: Information on other schools were obtained by enquiry.
                                                               23
Appendix II – Fees Comparison (Secondary Schools)




Note: Information on other schools were obtained by enquiry.
                                                               24
     Appendix III – Profitability of ESL (Draft 2009-10 numbers)




                                         HK$M     HK$M     HK$M



ESL:
Kindergartens                               9.1
Lang/Sports                                 9.5
ESL Admin                                 (7.7)
Net surplus (ex PIS)                               10.9

Renaisssance College                      (2.3)
Discovery College                        (19.0)
Total deficit from PIS                            (21.3)
ESL deficit                                                (10.4)




                                                                    25
    Appendix IV – Analysis of Differential between ESF
    Foundation Schools and PIS Fees

Renaissance / Discovery
($21.3m deficit amongst 2,524 students)
                                                             Yr 1-6    Yr 7-11   Yr 12-13
PIS current fee                                              72,500     97,000    98,000
Notional additional fees to be self sustaining                8,400      8,400     8,400


Theoretical fee required to totally cover costs              80,900    105,400   106,400 (a)


ESF current fee                                              61,000     93,000    94,000
ESF surplus
($88m surplus amongst 12,800 students)
Notional reduction in fees if surplus is eliminated          (6,800)   (6,800)    (6,800)


ESF government grant


($269m based on the current funding formula)
If there are no government grants                            17,809     23,990    23,990


Theoretical fee if no surplus / no government grant          72,009    110,190   111,190 (b)


Differential: comparing a) and b)                             -12%         4%         4%


(Note: Analysis based on 2009-10 draft financial numbers.)

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