Written evidence from the Association of Colleges

Further education colleges provide high-quality technical and professional education and training for young people, adults and employers. They prepare over three million students with valuable employability skills, helping to develop their career opportunities.

Colleges are inspirational places to learn because education and training is delivered by expert teaching staff in industry-standard facilities. From basic skills to postgraduate degrees, colleges offer first rate academic and vocational teaching, in a range of professions including engineering, hospitality, IT, construction and the creative arts.

Sixth form colleges provide high-quality academic education to 16 to 18-year-olds enabling them to progress to university or higher level vocational education.

The NAO report
 

In their recent report on FE colleges, Overseeing Financial Sustainability in Further Education Sector, the NAO observed the following:

• 29 of 244 colleges had an ‘inadequate’ rating for financial health by the end of 2013/14 (a Skills Funding Agency (SFA) assessment).
• The majority of college referrals to the FE commissioner have been prompted by financial issues. 41% of colleges had a worse financial health classification in 2014 than they forecast two years earlier.
• 110 colleges were in operating deficit in 2013/14.  In 47 cases, the operating deficit was more than 5% of income.
• £45 million of cash advances from the SFA were outstanding as of February 2015. These advances were necessary because banks were not prepared to extend credit to the colleges concerned.
• Over the last 20 years Government agencies have developed effective monitoring systems for financial health and have acted in a way that has ensured recovery – either by external intervention or self-improvement. However there is a risk that the number of colleges in financial difficulty and future prospects could create an overwhelming task for Government unless there is a change of approach.

The following points are relevant to the NAO report from a college perspective:

Colleges have strong financial credentials which they have built up over 20 years since they secured self-governing status. The financial strengths of colleges are evident in:

• A good record on financial reporting which includes consistent, publicly available information and a strong audit regime.
• The confidence with which colleges have embarked on capital development and partnership activity.
• The willingness of major banks to lend to the sector at relatively low rates.

Financial weakness in colleges

The NAO report focuses on Government intervention to protect public funds and students but it is worth noting the wider funding environment:

• Colleges receive funding from both the Department for Education (DfE), to educate and train 16 to 18-year-olds and from the Department for Business, Innovation and Skills (BIS) to educate and train people aged 19 and over. Neither funding stream is part of the Government’s protective ringfence which currently only covers the NHS, international development and the education of 5 to 15-year-olds. All 16 to 18-year-olds have to remain in education or training from September 2015 so not including them within the protective ringfence is unsustainable.
• The NAO report stated that total Government funding to colleges has been cut by 11% between 2010-11 and 2014-15. This is a cash figure. There was also a large cut in Government funding in 2015 which included a 24% cut in adult further education spending. A further announcement made in July this year placed an additional 3.9% cut on the adult skills budget. AoC estimates that there has been a real-term cut in Government funding between 2010-11 and 2015-16 of more than 27%.
• Government funding is paid out in one-year allocations, is set at rates that only cover costs and is subject to fast changing policy. In December 2013, DfE cut funding for full-time 18-year-old students by 17.5%, several months after colleges had started recruiting students. In July 2015, Justas stated above, BIS cut the adult skills budget two weeks before the start of the financial year after budgets had been signed off. In our spending review submission, AoC calls for three-year funding allocations for colleges to help them plan effectively.
• For the vast majority of colleges, debts owed to banks, local government pension funds, the Government and other creditors are manageable and are matched by assets (land and buildings in education use). There is, however, a small minority of colleges with unsustainable debt. It is worth noting that Government policy up until 2013 specifically encouraged colleges to borrow more to invest in their buildings.
• Colleges are required by law to offer public sector pensions to their staff. This allows them to construct an attractive reward package (despite relatively low pay levels) but means that colleges carry a pension debt adding up to £2 billion which they cannot control.
• Between 2015 and 2019, there will be 141,000 fewer 16 to 18-year olds in England[1]. This decline will have significant impact on college finances.

Qualification of SFA accounts

The Committee will be concerned to note that the NAO has qualified SFA's accounts. The NAO’s concerns are in relation to a capital grant which ended in March 2015. The main points are as follows:

• The College Capital Investment Fund was created in November 2012 following an allocation of £500 million for the 2013-14 and 2014-15 financial years.
• Given the time needed to prepare building projects, secure planning permission, organise public procurement and ensure that the education for continuing students is seamless, the period between November 2012 and March 2015 was too short a cycle for some.
• Most colleges completed their projects and claimed funding by 31 March 2015. However, 13 colleges were not able to do so and used payments in advance to manage the cashflow.
• The alternative would have been to cancel projects in December 2014, leaving half-finished buildings and exposing colleges to large construction claims.
• This example has shown that it is not sensible for the Government to run education capital projects on a one year, April to March, timetable.
• Capital funding for FE colleges is now routed via the Department for Communities and Local Government, Local Enterprise Partnerships and councils. However, there is still a one year, April to March, timetable and the consequences of delays in setting up this new fund will be an under-spend in 2015-16 and under-investment in the college estate.

Area reviews

The Government has launched a national programme of area reviews which will run between autumn 2015 and spring 2017 covering FE and sixth form colleges in every part of the country. The guidance for the reviews says it is likely that they will lead to the creation of fewer, larger colleges which are more financially sustainable. We are concerned about this process for a number of reasons:

• The reviews will be incomplete because school sixth forms are not included. There are 2,100 sixth forms, 1,400 of whom have fewer than 250 pupils. Small sixth forms will become increasingly unviable as the demographics and funding decline further.
• The reviews have started before the spending review announcement which may bring further cuts to Government spending on post-16 education and more change.
• There is currently no funding to pay for the costs of implementing the reviews. The current guidance suggests colleges should take on yet more debt to pay for merger costs.
• Although there are clear plans to cut public spending on post-16 education and training (because they are unprotected budgets), there are no signs of Government action to their expectations of colleges.

General Spending Review issues

Although the session isn’t primarily about general policy and funding, the Committee may want to use the opportunity to raise some of our ten key recommendations from our spending review submission, particularly those which relate to DfE:

1. Funding for the education of 16 to 18-year-olds should be the same as that provided for the education of 14 to 16-year-olds. This would reflect costs, ensure the best A Level and technical courses are available, ensure students achieve good English and maths results and reduce student drop-out. 

2. Three-year funding allocations should be introduced for colleges, reflecting the spending review period.

3. Schools and colleges should be asked to consider merging their sixth forms with a view to no sixth form having fewer than 250 students.

4. Government is encouraging colleges to merge in order to make long-term savings. The short-term costs of such mergers should be met by Government.

5. HM Treasury should cut the VAT on all sixth form education and should reduce public sector pension costs.

6. People aged between 19 and 24 should be able to get a loan to help them fund a college course in the same way as their counterparts in university.

7. Government should introduce a formula which funds adult further education on the basis of outcome agreements. These agreements would be drawn up by colleges and set out objectives agreed with local partners including councils, combined authorities and local enterprise partnerships (LEPs).

8. The apprenticeship levy should be set at 0.5% of payroll costs, paid by all public and private organisations with more than 250 employees and used to support high quality training.

9. Government should introduce long-term initiatives to help colleges recruit English and maths teachers.

10. Government should rationalise and clarify the roles of the Education Funding Agency (EFA), Skills Funding Agency (SFA), Higher Education Funding Council for England (HEFCE), the FE Commissioner and Ofsted.

October 2015