This chapter will examine the key issues discussed by submitters, including:
moving from an area-based socio-economic status score to a direct measure of income methodology for the funding of non-government schools;
the development of the new methodology;
the impact of the new methodology on regional schools and boarding schools;
the use of the median income of parents and guardians to determine the school's capacity to contribute score;
low data matching rates and missing data;
details contained in regulation; and
the funding of government schools compared to the funding of non‑government schools.
The chapter will conclude with the committee's views and recommendation.
The direct measure of income methodology
As noted in chapter 1, the bill proposes to transition from an area-based socio‑economic status (SES) score, to a direct measure of income (DMI) and capacity to contribute (CTC) score. This amendment intends to implement recommendations one and two of the National School Resourcing Board's (the Board), Review of the socio-economic status score methodology. The Board considered that a school community's capacity to contribute should be calculated based on a direct measure of the income of persons responsible for students in schools. The Explanatory Memorandum explains that the Board considered this would be 'a more fit-for-purpose, transparent, and reliable way' to determine a school community's capacity to financially contribute to the school.
The Catholic and Christian independent education sector welcomed the change from the current SES methodology to the proposed DMI methodology. For example, the National Catholic Education Commission (NCEC) stated that the SES score was a 'blunt instrument', which overestimated a school community's capacity to contribute for many Catholic schools. The Catholic Education Commission of Victoria (CECV) considered the SES scores to be 'a deeply flawed approach', with the biggest flaw being the use of area-based data. CECV concluded that the DMI methodology was more accurate and therefore a vast improvement on the SES scores. The Australian Association of Christian Schools (AACS) agreed that the methodology to determine the SES score was too broad and not reflective of the families who attend the school, and that the new methodology was a more precise measure. AACS stated:
Many of our schools have benefited from the new methodology and the process has affirmed what many Principals anecdotally suspected, that their SES scores were heightened due to surrounding geographical wealth that did not reflect the demographic attending their school.
Conversely, the independent school sector raised a number of concerns in relation to the DMI methodology, particularly the adverse impact it will have on regional schools and boarding schools. These concerns will later be discussed in detail.
The committee also received evidence directly from a number of schools that expressed deep concern that their funding would be significantly reduced under the new DMI/CTC methodology.
The Department of Education, Skills and Employment (the department) acknowledged that non-government schools will be impacted by the new DMI methodology. However, the department advised that '[t]hree quarters of schools are better or no worse off under the new measure with funding continuing to grow for the majority of schools'.
The DMI methodology will use an individual's adjusted taxable income to determine the amount of financial resources available to the individual. The department explained that the adjustable taxable income includes a range of income sources, including:
…particular fringe benefits, net investment losses and reportable superannuation contributions, and will have a particularly pronounced effect on individuals and families that make greater use of these forms of income.
The Association of Independent Schools of the Northern Territory (AISNT) expressed concern that the proposed methodology does not take into account a range of socio-economic factors such as the parental occupation and education, nor school level factors such as the percentage of Indigenous students and the geographical location of the school. Independent Schools Victoria (ISV) expressed similar concerns and explained that individual income levels can change more quickly than a person's education and occupation data, which 'will make the DMI methodology more volatile and unpredictable than the old SES methodology'.
However, other submitters, such as the Principals Association of Victorian Catholic Secondary Schools (PAVCSS) considered it a positive measure that the proposed CTC scores will not take into account the education and occupation of parents and guardians of school students, arguing that income was a more accurate and fair measure of needs-based funding.
PAVCSS provided strong endorsement stating that '[t]he proposed legislation will fix clear and long-standing inequities in school funding arrangements'.
The PAVCSS argued that Catholic schools are more likely to enrol lower‑income families, compared to independent schools. However, under the current SES methodology Catholic schools receive similar SES scores to nearby independent schools, despite families of Catholic schools tending to be on a lower income. PAVCSS argued that the 'unjust funding system' undermines the ability of Catholic schools to compete.
In addition to using the adjusted taxable income to determine the DMI, submitters suggested other income should be included to enable a more accurate calculation of a family's capacity to contribute, including:
'hidden' family income and wealth, such as income earnt overseas, family tax minimisation strategies, and transfer of family wealth such as when grandparents contribute to school fees;
beneficiaries of trusts, company for directorships and shareholdings;
assets included in the above trusts or companies; and
a family's capacity to earn rather than income as family income can be masked by the ability to negatively gear and reduce tax.
Moreover, some submitter such as the Australian Education Union (AEU) and Save our Schools Australia also suggested that a school's wealth should also be used to determine the CTC score. The AEU argued that the following data should be included in the calculation of a school's CTC score:
School wealth including expenditure on equipment
School income through alumni fund raising, trust funds and endowment funds and parental donations
The prevalence of the reallocation of recurrent funding to capital projects by schools.
Development of the new methodology
A number of submitters, including the Independent Schools Council of Australia (ISCA), expressed concern with the development of the DMI methodology. As a member of the Direct Income Measure of Capacity to Contribute Technical Working Group (the Working Group), ISCA explained that due to the unavailability of data, the Working Group could only consider issues on a theoretical basis. ISCA noted that it did not see any modelling of the CTC scores using different variables or settings, or any potential funding impacts on schools. Accordingly, this meant that 'proper consideration of the possible elements of the new model [was] impossible' and that 'no input or advice was able to be provided on possible issues or areas for concern with the CTC methodology'.
Submitters also contrasted the work on the development of the current SES methodology, which took over three years to develop, test and validate, with the work to develop the DMI methodology, which took one year. Submitters implied that insufficient testing has been conducted on the new methodology and its impact on schools.
ISCA also noted that throughout the development of the DMI methodology, confidentiality arrangements were in place, which prevented broader discussion of the proposed changes. Similar concerns were raised by the independent school sector such as ISV, who recommended that the confidentiality provisions be lifted to enable timely advice to be provided to schools.
The department outlined that the 'final settings for the [DMI] were developed through extensive consultation over a 12-month period'. The department acknowledged that the Working Group was only provided with papers covering the theoretical aspects of the new methodology, but noted that the group provided advice on 'the statistical merits, strengths and weaknesses of each option'. The department advised that the group 'considered refinements to the direct measure, including the consideration of income type, the treatment of missing data and account for family size'.
Impact on regional schools and boarding schools
A number of submitters asserted that regional schools and boarding schools will be disproportionately impacted by the change in methodology. The Association of Independent Schools of New South Wales (AISNSW) claimed that 'the application of the new methodology, which relies solely on parent or guardian income, has created unintended consequences because it fails to acknowledge the particular circumstances of many independent regional and boarding schools'. AISNSW elaborated:
AISNSW analysis of the new CTC scores shows that in areas where only one fee-paying school operates, that school is impacted more greatly by the new DMI funding methodology than fee-paying schools in areas where a choice of such schools is available.
This is because students from higher income families are concentrated through a lack of choice in a community's sole fee-paying school, intensifying the impact of the new DMI funding methodology.
As a result, the CTC scores of five independent schools in regional NSW has risen by 10 points or more, with a corresponding reduction in government funding.
The Coalition of Regional and Independent Schools Australia (CRISA) explained that an increase in the CTC score would result in a decrease in funding. For each point increase it was estimated that a school would lose approximately $310 per student per year.
The CRISA noted that the worst effected school will see an increase of 18 points, from 97 to 115, which would equate to the school losing $5,600 per student per annum. This was contrasted with a large metropolitan school, where the DMI score increased by 13 points, from 123 to 136. However, CRISA explained that from 125 points upwards, the school would receive the minimum base funding and therefore the metropolitan school’s score would effectively only increase by two points resulting in the school losing approximately $600 per student per annum. CRISA concluded that:
The burden of funds-shifting in this proposed new system is falling disproportionately heavily on mid-SES schools, many of them regional and outer-metropolitan schools which can least afford this impost. There is not the population pressure in regional areas to shore up enrolments if a decline sets in.
ISV similarly noted that large schools are able to absorb changes in their funding on a year-by-year basis, more effectively than small schools.
Moreover, AISNSW described how incomes in rural and regional areas can be subject to severe fluctuations compared to incomes in urban areas. AISNSW suggested that the DMI methodology should be adapted to respond to this volatility. AISNSW stated:
In a severe downturn, regional families' incomes would be impacted immediately - several years before a school's 'rolling average' can be adjusted to adequately reflect the change.
An alternative measure therefore needs to be developed for regional and boarding schools that responds sooner to income volatility and restores educational attainment and occupation to the measure of advantage.
In relation to the impact on boarding schools, Independent Schools Queensland (ISQ) stated that boarding schools appear to be 'extremely negatively affected by the changes to the CTC settings'. ISQ advised that Queensland boarding schools will have an average CTC score increase of eight points and nearly 70 per cent of boarding schools will see an increase in their CTC score.
The Isolated Children's Parents' Association of Australia (ICPA) commented that there is often a misconception that students attend boarding school to obtain an 'elite' education. However, ICPA explained that it is not uncommon for rural locations to not have a middle school or high school, and in remote locations, the only option available is distance education. Because most boarding schools are independent or private schools, many rural and remote students must board at independent boarding schools. ICPA concluded:
For rural and remote families who have limited access to schooling other than independent boarding schools, an increase in fees may make an education even further out of reach for students from rural and remote areas as families are unable to afford the increased fees. This would be exacerbated by the effects of drought and other rural hardships on families when they are already struggling to pay fees to continue their children’s compulsory education.
With respect to the claim that regional schools will be disproportionately impacted by the new DMI methodology, the department advised the following:
There are 55 non-systemic independent schools where funding will reduce over time to 2029. The majority of these schools are located in major cities and had an average fee schedule of $20,000 in 2017 (weighted by enrolments). Schools in regional and remote areas will continue to receive higher per student funding than metropolitan schools.
On 2 March 2020, Minister Tehan announced the following measures to further assist the transition to the new DMI methodology:
Under the Choice and Affordability Fund, the state-based Catholic Education Commissions and Associations of Independent Schools will flexibly administer the fund, including quarantining a percentage of funding that will flow directly to regional and remote schools.
A robust review process will be established by July 2020 to address unexpected or unique circumstances affecting the financial capacity of a school’s community.
The National School Resourcing Board will examine the Schooling Resourcing Standard (SRS) loadings as they impact students and schools in regional Australia. I will be taking the Terms of Reference for this work to the next COAG Education Council. The review will commence by June.
Further work will be undertaken in consultation with the ABS and the sector to investigate what additional data could be used to further refine how the capacity to contribute is calculated.
The announcement was welcomed by the independent school sector.
Use of median income
Recommendation two of the Board's final report recommended that '[t]he capacity to contribute for a school be determined based on a direct measure of median income of parents and guardians of the students at the school'.
Some submitters raised concern that the use of the median income would significantly disadvantage regional schools and boarding schools. ISCA explained that the use of the median income usually provides a lower number than the use of the mean, but that this is not true when there is a broad distribution of income:
Statistically, the use of the median mitigates the impact of outliers and generally provides a lower number than the use of the mean however using a single number as the reference point for the calculation of the CTC scores also fails to take other factors into account.
…The use of the median for schools with a very broad distribution of income will significantly disadvantage the large number of families below the median if the DMI CTC score is higher than the SES CTC score. That disadvantage increases the further below the median the family is placed.
As stated by ISQ, '[t]he use of the median is potentially flawed, as by definition 50% of parents with children enrolled at a school will be below the median' and therefore will have difficulty in paying the school fees.
Submitters explained that a reduction in funding would result in an increase in school fees or a reduction in programs offered, or both. ISQ stated:
A real danger under the DMI methodology is that schools with a bimodal distribution will be required to increase their fees with a resultant reduction in the number of families below their median income being able to continue at the school. This would ultimately drive their median income to an even higher level.
It was also observed that the use of the median income and a decrease in funding could place a school into a downward spiral towards the closure of the school. CRISA explained:
Fee rises will cause families with more modest incomes to withdraw from the school. This will force the median income of the school up, which will in turn result in further loss of funding, leading to more enrolment losses. Hence the school is placed in a downward spiral towards closure.
At a national level, this will ultimately push the mid-fee regional schools either to be small, high-fee schools, to cut programs and become low-fee schools, or to cease to exist as a choice for families in these areas.
To replace the use of the median income, submitters suggested that an alternative measure be used for regional schools and provided the following range of options:
the first quartile value;
the quartile average value (that is, the average of the first, second and third quartile family income in each school); and
The department advised that stakeholders and technical experts were consulted on whether the median income would be a reliable measure to determine income distribution within a school. Furthermore, analysis was undertaken with stakeholders to consider a range of alternative measures. The department stated:
On balance the Government decided to use the median as this was recommended by the Board as the most fit for purpose statistical measure for use in the direct measure of income. Further, the use of the median expands the range of options available to reflect the circumstances of low income earners.
In addressing the need to assist schools to transition to the new methodology, the department advised that it will continue to work with the Australian Bureau of Statistics (ABS) to assess 'whether additional data can allow a school's CTC score to be calculated using a mean as opposed to the median parental income for the school'.
Data matching rates and missing data
Some submitters raised concerns in relation to missing data and matching rates used to determine the CTC score. The current SES/CTC methodology requires a 95 per cent data match rate to produce the SES/CTC score. However, the proposed methodology does not include a similar safeguard to produce a DMI/CTC score.
The ISCA acknowledged that a high matching rate is not necessarily required to calculate a valid score when a school community is fairly homogenous because missing data can be imputed. Conversely, this same approach cannot be adopted to produce an accurate score where the school community is not uniform. ISCA contended that this will significantly disadvantage small schools, rural and remote schools, boarding schools, and schools with high numbers of disadvantaged students.
A number of submitters provided examples of the low data matching rates, asserting that they are not high enough to accurately calculate the school’s capacity to contribute. For example, AISNSW noted that one New South Wales independent school whose SES score will increase by seven points, has a data matching rate of 57 per cent. ISQ advised that it has been provided with the linkage rates of family details to taxation records for independent schools of between 67 per cent and 97 per cent. It concluded that 'the validation process has not been sufficient'.
ISQ acknowledged that the reason for data not successfully linking is unclear. The Association of Independent Schools of South Australia agreed, adding that:
[i]t is not clear at this point what level of volatility there will be with the move to the rolling averages as no modelling has been released on the year on year changes. It is further not clear whether this analysis has been undertaken by the department.
AISNT proffered the view that it was highly likely that income data for their most disadvantaged students, particularly indigenous students from remote and very remote communities, were not being matched, resulting in an inflated CTC score for the school. AISNT provided the following case study:
An example of this from Table 6 above, is School 3, which has had a large increase in the DMI CTC Score, calculated using a matching rate of 83%. The student cohort comprises of 19% Indigenous students from remote and very remote communities and highly disadvantaged backgrounds. It is the view of AISNT that the missing 17% of data is comprised mostly of the school’s Indigenous population and the school’s CTC score is overstated.
ISV recommended that more information be provided to schools about how their DMI/CTC scores have been calculated, including the specific data underlying these calculations. This view was shared by ISCA who acknowledged that the appeals process is currently being developed, however, raised concerns that it was not clear what consultation would take place with the non-government school sector.
The department advised that improvements have been made to link the names and addresses of parents and guardians with other data. The department explained that in 2017 the Board used data that linked with student addresses only. Addresses that were not linked were excluded from the school population for the purposes of calculating the median income. Analysis indicated that regional addresses were more likely to be excluded due to a failure to find an exact match.
In 2018 and 2019, address collections included the names and addresses of parents and guardians, thereby creating more opportunities for data to be linked. In relation to the 2019 address collection, the department advised:
names and addresses of 2.5 million parents/guardians for 1.3 million students attending non‑government schools was collected;
6 per cent of students had one parent submit;
94 per cent of students had two parent/guardian records submitted, of these:
63 per cent had both parents/guardians successfully linked to 2016-17 tax returns;
19 per cent had one parent/guardian linked, but not the other; and
12 per cent had both parents/guardians not linked.
The department explained that a range of data is used to link names and addresses of parents, including data related to low-income concession cards. According to the department:
Parents who reported lower income in the Census are more likely to be missing from personal income tax. The use of concession card data provides significant improvement in coverage for those in low-income brackets whilst PAYG improves coverage of mostly moderate to high‑income individuals.
The department advised that it 'will continue to work with the ABS to explore the use of additional data sets that could further improve the quality of the CTC methodology'.
The department also addressed concerns raised with respect to the impact that funding volatility could have on schools. The department explained that a three-year rolling average of scores would reduce funding volatility and would provide schools with the likely trend in the following year. The department advised:
Analysis indicates that after applying a three year rolling average, CTC scores for the vast majority of schools would be stable over time, however CTC scores of some very small school would still be volatile. Between the 2018 and 2019 single year DMI scores, 14 small schools characterised as having less than 200 students changed by more than 6 points, which means CTC scores for these schools could change by more than two points year on year. To provide additional stability on top of the rolling average, CTC score changes for small schools will be capped at two points from 2022.
Submitters were generally supportive of the inclusion of transitional arrangements. As outlined in chapter one, these arrangements include:
a phased implementation of the DMI methodology which allow schools until 2022 for their CTC score to be based on the best of one of three options; and
a two year extension (until 2029) for schools to transition down to 80 per cent Commonwealth share of their Schooling Resource Standard (SRS).
ISV commented that schools would feel the full impact of the new DMI/CTC methodology after 2022 when the proposed transition provisions cease to operate. ISV recommended that suitable transition arrangements be implemented for schools who's CTC scores change beyond 2022, and that schools be provided their CTC score at least 12 months in advance of it being used to determine funding.
The ISCA similarly recommended that each of the proposed transition periods for schools be extended by two years 'to allow time for improved road testing of the model and development of suitable alternatives'.
In contrast, some submitters such as the Australian Council of State School Organisations (ACSSO) questioned the need for a transition period, arguing that the timeframes are 'excessive' given that schools have been 'reaping excessive funding for years if not decades'.
As stated earlier the government announced a Choice and Affordability Fund, consisting of $1.2 billion over 10 years (from 2020 to 2029), to the Catholic and independent school sector, to further assist schools, particularly regional and remote schools, with the transition as proposed by the bill and Regulation.
However the ISQ considered that it was unlikely that the fund would be sufficient to assist schools affected by the new DMI methodology. This view was supported by ISCA who explained the limitations on the fund:
As announced by Minister Tehan, a portion of this funding will be used specifically to assist regional and remote schools requiring transition assistance. This amount is currently set at 9% of the Fund in the Guidelines however the Independent sector is working with government to increase this proportion. The Guidelines also require that funds be utilised to assist non-regional schools requiring transition assistance and also special circumstances funding.
While the Choice and Affordability Fund was initially set up to address a range of priorities, It is highly likely that a significant proportion of the Choice and Affordability Fund will go towards assisting schools to transition as a result of the introduction of the DMI CTC methodology.
However, ACOSSA argued that the government should not be relying on the sector to distribute funds to schools, particularly when it is introducing a methodology to assess the financial need of individual schools:
Of particular concern is the mode of distribution. If you are going to introduce a formula that identifies the financial need of an individual school, it is essential that [the] allocated [amount] for that school reaches that school directly. Providing it to a centralised bureaucracy (a sector) with power to distribute as they see fit will only result in some schools being over funded whilst other schools continue to be short changed. This practice has been evident, particularly in the Catholic system for some time – what guarantee can the Federal Government give that it won’t continue – transparency in funding is key to truly addressing need.
Details in regulation
As outlined in chapter one, the details of the proposed DMI methodology and CTC score, as well as the transition path for non-government schools, will be contained in Regulation.
The AEU argued that this would give the Minister 'unprecedented powers to change school funding without having to pass legislation', and that this 'sets an extremely dangerous precedent for the determination of school funding in Australia'.
Responding to this concern, the department advised that the approach will 'enable refinements to the methodology to be implemented as new data becomes available'.
Funding to non-government schools verse government schools
Although peripheral to the bill, some submitters expressed concern that non‑government schools continue to receive more funding than government schools. The Federation of Parents and Citizens Association New South Wales argued that more funding should be provided to government schools given that 65 per cent of students attend a government school.
ACSSO observed that funding for government schools will only reach 95 per cent of their SRS due to agreements with state and territory governments. This concern was shared by the AEU who stated:
The government’s 20% cap on commonwealth funding of public schools will ensure that a tiny minority will reach 100% of SRS by 2023, whereas the inverse applies for private schools – the Commonwealth Government’s promise to deliver 80% of SRS to private schools by 2023 will mean that the vast majority of private schools in Australia will exceed 100% of SRS in the next four years.
Conversely, the independent school sector asserted that a 'strength of the independent schooling sector lies in the rich mix of education choices and opportunities'.
Mr Chris Curtis provided a different perspective arguing that Australia's school funding model should be completely reconsidered. Mr Curtis maintained that any capacity to contribute model would segregate students by class. Mr Curtis explained:
The consequence of this funding policy will be to further socially stratify our schools because it says the more you earn the less your child gets. Thus, the wealthy, the upper middle, the middle middle, the lower middle and the poor all have to concentrate in their own schools because the funding system segregates them. A school that wants to take both middle‑class and poor students will not be able to because the presence of middle-class students will cut its government funding and thus push its fees up and thus drive out the poor, who will end up at the government school.
Mr Curtis recommended that the capacity to contribute model be removed and replaced with a more needs-based model, such as those that operate in England, Finland and New Zealand.
The department advised that despite the Australian Government not being responsible for operating schools, the government has a role in education funding and policy. Accordingly, funding of schools is shared between the Australian Government and state and territory governments. The department stated that funding for government schools 'will continue to grow by 4.8 per cent on a per student annual average over 2018 to 2029'. Moreover, the Australian Government has committed to providing record levels of recurrent funding for schools from $17.5 billion in 2017 to $32.5 billion in 2029.
The bill and corresponding Regulation will introduce a more accurate method of determining a school community's capacity to contribute to the funding of non-government schools. For most non-government schools, the new methodology will result in an increase or no change to their funding from the Australian Government. In addition, the bill will allow for a phased implementation to the new methodology and allow adjustments to be made to the transition pathway for non-government schools that will be financially adversely affected.
The committee has considered the concerns raised by submitters. Particularly concerns in relation to the new DMI methodology, the disproportionate impact the methodology may have on regional schools and boarding schools, the use of the median income of parents of schools, low matching rates in relation to the data use to determine a school's CTC score, and the transitional arrangements.
In response to concerns that regional schools will be disproportionately impacted, the government announced that a review process will be established to address unexpected or unique circumstances affecting the financial capacity of a school community. Additionally, the Board will commence a review in June to examine the SRS loadings and its impact on students and schools in regional Australia.
With respect to improvements that could be made to the DMI methodology and the matching of data, the committee is reassured with the improvements the department has made to capture relevant data to link with the names and addresses of parents and guardians. Moreover, the department advised that it will continue to work with the ABS to further improve the quality of the CTC scores for individual schools. The committee is supportive of the department's commitment to continue to investigate ways to improve the quality of data used to assess a school's CTC score.
The committee acknowledges the concerns raised by submitters in relation to the appropriateness of using the median income of parents at schools to determine the CTC score of the school. However, the committee notes that the use of the median income was a direct recommendation of the Board. Furthermore, the department advised that analysis was undertaken with stakeholders to consider a range of measures, including that the median income would be a reliable measure to determine income distribution. Having regard to this information, the committee considers the use of the median income to be appropriate.
The committee is of the view that the bill will ensure that school funding to non-government schools will be allocated according to the needs of individual schools and distributed to schools fairly and transparently. Accordingly, the committee recommends that the bill be passed.
The committee recommends that the bill be passed.
Senator the Hon James McGrath