Circular 2005/16 - Crown Entities Act 2004 - Financial

This circular outlines changes to the financial responsibilities of boards of trustees introduced by the Crown Entities Act. Information about changes to boards' governance responsibilities is contained in Circular 2005/17

Circular Number: 2005/16
Category: Finance

Crown Entities Act 2004 - Finance

This circular is about: This circular outlines the changes to the financial responsibilities of boards of trustees introduced by the Crown Entities Act. Information about the changes to the boards' governance responsibilities is contained in Circular 2005/17.

The action required is: Note the changes to current board financial responsibilities and ensure that your school follows these.

It is intended for:

  • Boards of trustees, principals and executive officers of all state and state-integrated schools, and the Correspondence School.
  • Financial service providers to schools and preparers of school annual reports.

For further information: Direct any enquiries about this circular to your school's accountant, accounting service provider or auditor, or your local Ministry of Education financial advisor.

Purpose of the Crown Entities Act

The Crown Entities Act (the Act) came into force on 25 January 2005 as one part of a range of measures designed to strengthen the whole State sector.

How the Act affects boards of trustees

School Boards of Trustees are recognised in the Act as forming a special category of Crown entity, and are subject to only those parts of the Act that are appropriate to their existing roles and responsibilities. The Act introduces a small number of financial management and reporting provisions that apply to Crown entities generally, including Boards of Trustees, as well as a series of changes that are specific to Boards by amending the Education Act 1989.

The general governance provisions contained in the Act are new to Boards and are intended to bring greater consistency to the governance responsibilities of all Crown entities. The specific changes are also intended to bring consistency across Crown entities, but have been tailored to suit Boards of Trustees, in particular, and are included in the Education Act 1989 for accessibility.

Details of the changes, and guidance on how to interpret and apply them, are included below. A list of all the relevant sections in the Act, cross-referenced to any consequent amendments in the Education Act 1989, is attached as Appendix 1.

What will this mean in practice?

In most respects, little has changed in the financial management responsibilities of Boards. However, several of the current requirements and limitations placed on school Boards of Trustees have been modified or clarified by the legislation.

In general, the purpose of these changes is to limit the amount of risk that Board funds are exposed to. For example, by limiting the type of securities that a Board can invest in, the Crown Entities Act has reduced the likelihood that school funds could be lost due to the collapse of a financial institution.

Key changes to the financial management responsibilities of Boards

School bank accounts

Boards may only operate bank accounts held in registered banks or building societies that either:

  • meet a minimum credit-test; or
  • have been approved by the Minister of Finance.

As of 25 July 2005 the following building societies qualified under the gazetted conditions for use by Boards:

  • Southland Building Society
  • Southern Cross Building Society
  • Ashburton Building Society

The Ministry of Education maintains an up-to-date list of the banks and building societies that meet these criteria.

Accounts outside New Zealand or holding foreign currency

Your Board must have permission from the Minister of Finance if it wishes to:

  • operate a bank account in a bank outside New Zealand, or
  • operate a bank account in a currency other than New Zealand dollars.

Integrated schools

Boards of integrated schools must not deposit funds into the bank account of their proprietor or operate a bank account of the proprietor as if it were their own. This means, for example, that a Board may not collect maintenance dues on behalf of the proprietor and pay them directly into the proprietor's bank account. All money collected or earned by the Board must be paid into the Board's own bank account.

Further information

Education Circular 2005/7 provided detailed information about new requirements for the operation of school bank accounts.

Restrictions on the investment of Board funds (acquisition of securities)

Boards may only invest funds in:

  1. NZ dollar debt securities that meet the minimum requirements of the credit test set out in Appendix 2; or
  2. securities issued by the New Zealand government (e.g. Government Stock and Treasury Bills); or
  3. a security given prior approval by the Minister of Education and the Minister of Finance.

If you wish to seek approval for an investment which does not meet the requirements of points 1 or 2 above, please follow the application process set out in Appendix 3.

If your Board holds investments under approvals given by the Minister of Education prior to 1 April 2005 and wants to roll-over the investment, you must seek re-approval prior to maturity.

The Ministry of Education maintains a list of public securities, registered banks and entities approved by Ministers that meet these criteria. Boards of trustees should review their investments and if they are not on this list, check with the entity that it has the appropriate credit rating.

Boards should note that the following types of investment continue to be unlawful without prior Ministerial approval:

  • Loans made to employees
  • Investment of funds by integrated schools in their proprietor

Catholic Development Funds

The Ministry is currently reviewing the status of funds invested by Catholic integrated schools in the Catholic Development Funds of their diocese.
Catholic Development Funds have no credit-rating and therefore must have Ministerial approval before schools can invest in them. The Treasury and the Ministry are currently investigating this matter and have not yet made any recommendations to the Ministers of Finance and Education. Once this process is complete all Catholic integrated schools will be advised of the outcome.

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Borrowing

Your Board may borrow any amount of money it sees fit from any source provided that:

The total annual cost of repaying outstanding borrowings (including both principal and interest components) is equal to or less than 1/10th of the school's annual operational funding.

This requirement reproduces the borrowing limit previously set by the Minister of Education under earlier provisions of the Education Act.

Limitations on guarantees and indemnities

Your Board cannot offer a guarantee or indemnity unless it relates to:

  • the performance of a non-monetary activity (for example, the Board may undertake to perform the functions of a lead school in a schooling improvement cluster, or an RTLB cluster); or
  • a contract lawfully entered into by the Board (for example, a loan agreement).

A complete list of those circumstances where your Board may give a guarantee or indemnity is attached as Appendix 4.

Restrictions on the use of derivatives

A derivative is a contract or security that derives its value from:

  • an underlying asset;
  • the value of a rate (eg, an interest rate or currency exchange rate); or
  • index of asset value (eg, a stock index).

An example of a derivative is a foreign exchange option - that is, a contract for the purchase of a set amount of foreign currency at a set price on a set date in the future.

In broad terms, your Board may not enter into a derivative transaction unless it relates to:

  • a foreign exchange transaction lawfully entered into by the Board; or
  • a sale and purchase contract where delivery is to take place in the future.

A complete list of those circumstances where a Board may use derivatives is attached as Appendix 5.

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Gifts

Your Board may accept or reject any gift offered to the school.

Gifts of items that a Board could not acquire on its own behalf

From time to time Boards may be offered the gift of an item that it could not acquire on its own behalf. For example, the Education Act 1989 prevents Boards from purchasing real property without prior approval. If your Board accepts such a gift, it may continue to hold the gift for a reasonable period. Should your Board wish to continue to hold the gift it is advised to seek approval within 12 months of receiving it.

In some circumstances a Board may receive a gift or bequest where, as a condition of the gift, the Board must continue to hold it in its current form. This form of gift is common in schools where the donor requires the Board to hold a security and fund activities or prizes from the return on that security. In these circumstances, the Board may continue to hold the gifted security without needing to seek approval.

Reporting of payments to Trustees and Board employees

From 2006 there will be a new requirement for Boards to report payments made to trustees, committee members and employees.

The Education Act 1989 previously required school annual reports to report the total value of payments and benefits provided to the principal. From 2006 your Board is also required to report the value of payments to trustees, and the number and value of payments to any employees earning $100,000 per annum or more.
Details of these reporting requirements are attached below in Appendix 6.

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Further information

Detailed information relating to:

  • bank accounts;
  • acquisition of securities;
  • investments;
  • borrowing;
  • guarantees and indemnities;
  • derivatives; and
  • gifts

is available in the Financial Information for Schools Handbook.

Enquiries can also be directed to the New Zealand School Trustees Association Helpdesk on 0800 782 435.

Advice and support

If you have questions about the legislative requirements set out in this circular and their impact on your school, ask your school's accountant, accounting service provider or auditor. The Ministry also has financial advisors who are experienced in schools' financial matters who can provide advice and support. Their contact details are listed below.

Regional finance contacts

  • Northern Region
    09 632 9940
  • Central North Region
    06 833 6734
  • Central South Region
    04 463 7634
  • Southern Region
    03 378 7777

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Issued by

Senior Financial Advisor
Ministry of Education
National Office
45 - 47 Pipitea Street, Thorndon
P O Box 1666, Wellington
Phone 04 463 8000
Fax 04 463 8001

Appendix 1 - Legislative references

ProvisionNewAmendment to status quoReference in Crown Entities ActConsequent change to Education Act 1989
Disclosure of payments to trustees and school employees   _ Section 152 Section 87(2)(ca)
Statement of Responsibility   _ Section 155 Section 87(4)
School bank accounts _   Section 158  
Acquisition of securities (investments)   _ Sections 160 & 161 Repeals section 73 and substitutes new section 73
Borrowing   _ Sections 160 & 162 Repeals section 67 and substitutes new section 67
Guarantees and indemnities _   Sections 160 & 163 Repeals section 67A and substitutes new section 67A
Use of derivatives _   Sections 160 & 164 Repeals section 67B and substitutes new section 67B
Gifts   _ Section 167 Repeals section 68(1) and substitutes new subsections 68(1), 68(1A), & 68(1B)
Accounting Records _   Section 168  

Where can I see a full list of all the provisions of the Legislation that will apply to boards?
The third Schedule of the Crown Entities Act 2004 contains a full list of all the provisions within the Act that apply to Boards of Trustees. A list of these provisions is also included in Schedule 5A of the Education Act 1989. Electronic copies of both of these statutes are available online at www.legislation.govt.nz.

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Appendix 2 - Legislation relating to investments

Note: within the legislation `investing' is termed the "acquisition of securities".

Your board may invest funds in:

  1. a debt security in NZ dollars and
    a. issued by a registered bank, or other institution, and the security
    (i) is rated as "A-", or "A-1" for short term securities, or higher by Standard and Poor's Ratings Group, and
    (ii) is rated as "A3", or "Prime-1" for short term securities, or higher by Moody's Investors Service Inc, except that
    (iii) Where the security is only rated by one of the two agencies listed above it need only satisfy the test for that agency,

    Or

    b. that meets a credit rating test that is specified in a notice in the Gazette published by the Minister of Finance.
  2. 2 a public security (this includes any loan or credit agreement, guarantee, indemnity, bond, note, debenture, bill of exchange, Treasury bill, Government stock, and any other security representing part of the public debt of New Zealand)
  3. 3 a security given approval jointly by the Minister of Education and the Minister of Finance (see Appendix 3 below).

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Appendix 3 - The approval process for investments

If your Board intends to acquire a security that does not meet the requirements set out in points 1 or 2 of Appendix 2 above, it must have the prior approval of the Ministers of Finance and Education.

Boards seeking approval for the acquisition of a security must send the Ministry a written application. Applications need to include:

  1. the business reasons for acquiring the securities;
  2. information on the benefits to the Board if it acquires the security;
  3. a copy the Board's latest audited financial statements (if they haven't already been sent to the Ministry) and current year-to-date financial information for the school;
  4. a full description of the security, its value, and the term over which the Board wishes to hold the security;
  5. details of any interest a Board trustee may have in the security, and the extent and financial value of that interest;
  6. any credit-rating or other financial risk information about the security or its issuer;
  7. any security offered by the issuer, including any guarantee they provide;
  8. an assessment of the potential effect on the school if the issuer defaults;
  9. information on the Board's actions, or planned action, to minimise the financial risk associated with this investment; and
  10. anything else you think the Ministry should know about this application.

Additional conditions for equity securities

If your Board wishes to acquire equity securities (e.g. shares), it must show that the business reasons reflect the strategic direction and objectives set out in your charter.

Ministers are unlikely to approve applications from Boards wanting to invest in equity securities for financial return rather than for a business reason. This is because of the higher level of risk generally associated with those investments.

Approval applications

Boards seeking approval should send a written application to:

The Senior Financial Advisor
Ministry of Education
PO Box 1666
WELLINGTON

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Appendix 4 - Restrictions on guarantees and indemnities

Your Board may offer the following guarantees or indemnities;

  1. a guarantee to perform another person or organisation's activity (for example, a Board may undertake to perform the functions of a lead school in an administration cluster, a schooling improvement cluster, or an RTLB cluster)
  2. an indemnity relating to:
    a. a loan agreement lawfully entered into by the Board as borrower;
    b. a contract to lease real property entered into by the Board as lessee, tenant, or assignee;
    c. a contract or deed executed by the Board to settle litigation;
    d. a hire or hire-purchase contract;
    e. an insurance contract;
    f. a contract for the sale and purchase of goods;
    g. a contract for the purchase of services;
    h. a contract for the purchase of an intangible (including intellectual property or a license of intellectual property).

If your Board wishes to give a guarantee or indemnity that is not listed above it must have the prior approval of the Ministers of Finance and Education. Boards seeking this approval should send a written application to:

The Senior Financial Advisor
Ministry of Education
PO Box 1666
WELLINGTON

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Appendix 5 - Restrictions on the use of Derivatives

Your Board may enter into the following derivative transactions:

  1. a foreign exchange transaction with a bank, building society, or bank outside New Zealand that satisfies the credit-rating test set for banks and building societies (see above), for the purpose of:
    a. purchasing foreign exchange (including travellers cheques) for use by Trustees or Board employees while in the country of that foreign currency or while en route to that country:
    b. purchasing foreign exchange in order to discharge a liability arising under any of the classes of contract referred to in Appendix 4 above:
    c. purchasing foreign exchange in order to-
    (i) deposit funds into a bank account:
    (ii) invest in debt securities:
    (iii) repay borrowing:
    (iv) pay a guarantee or indemnity.
  2. a futures contract to cover any authorised foreign exchange transaction:
  3. a foreign exchange transaction undertaken with a foreign exchange dealer on a cash-for-cash basis:
  4. the sale and purchase of goods or intangibles (including intellectual property rights, but not including securities) that are not traded in the commodities or the capital markets, delivery of which is to occur in the future:
  5. an option to lease, or renew the lease of, real property:
  6. an option to purchase, hire, or hire purchase goods that are not traded in the commodities markets:
  7. an agreement to assign intellectual property rights, or other property rights, contained in a contract of employment:
  8. a contract to acquire debt securities where delivery must take place in the future.

If your Board wishes to enter into a derivative transaction that is not listed above it must have the prior approval of the Ministers of Finance and Education. Boards seeking this approval should send a written application to:

The Senior Financial Advisor
Ministry of Education
PO Box 1666
WELLINGTON

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Appendix 6 -Disclosure of payments to trustees and board employees

Your Board's annual report for 2006 and future years must include:

  • the total value of the remuneration paid or payable to each trustee;
  • for each committee member who is not a trustee or an employee the total value of the remuneration paid or payable;
  • the number of employees, other than the principal, to whom remuneration was paid or payable in their capacity as employees, the total value of which is or exceeds $100,000 per annum, and the number of those employees in brackets of $10,000;
  • a report, presented in the manner required by the Minister by notice in the Gazette, on the total remuneration (including benefits, any compensation, ex gratia payments, any other payments, and any other consideration paid or payable in the school principal's capacity as an employee) paid to a principal of the school; and
  • the total value of any compensation or other benefits paid or payable to persons who ceased to be trustees, committee members, or employees during the financial year in relation to that cessation and the number of persons to whom all or part of that total was payable

Note: Reporting on Principal's remuneration and compensation payments to trustees, committee member or employees commenced in 2004.

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