AoC Yorkshire and Humberside

College funding and finance issues

19 June 2014

Julian Gravatt, Assistant Chief Executive, AoC

Julian_Gravatt@aoc.co.uk

02070349900

@JulianGravatt

http://www.aoc.co.uk/term/funding-finance

Lots of activity - agencies, initiatives, acronyms etc

Periodic changes to the funding formula – 2003, 2008, 2013

Incessant fiddling with qualifications, prices and programmes

Funding used to nudge and control

Budgets that change every year despite multi year spending reviews

Desire to squeeze every ounce of value out of every pound spent

Twenty years of funding, what we’ve learnt

College income and expenditure

1993-4

2012-3 %

FEFC, EFA+SFA

2,364 5,627 +138%

Other 1,150 1,943 +68%

Income 3,508 7,570 +115%

Staff 2,390 4,806 +101%

Supplies 1,125 2,822 +151%

Expendit 3,515 7,628 +117%

Surplus (7) (58)

% Diversity 32% 26%

% Staff cost 68% 63%

College accounts

Colleges have increased fully funded student numbers at a time when eligibility has widened. Fees have been harder to secure than external contracts.

Colleges do more sub-contracting and set aside 8% of income on depreciation and interest but spending on staff predominates

Average College income£7 mil in 1993, £22 mil in

2012GDP deflator up 51% in same period

College accounts 2013-14

College finance characteristics

Over the last ten years….

Small operating surpluses

Positive cash generation (surplus + depreciation)

High use of assets with substantial capital investment

Capital finance from mixture of grants, sales, loans and own cash

Loan terms have shortened and interest costs are currently low

Income reliance on government (esp 16-18 increased)

The DFE/BIS split means Colleges have multiple funders

Government funding now on a consistent downward slope

Education remains staff intensive (Schools 79%, FE 63%, HE 55%)

Short government policy horizons creates employment instability

Financial health

College finances

Deficits in 2012-13 (48% of operating deficits, 10% cash based deficit

Staff costs 60-65% of income

Public spending cuts -> 4% fall in EFA+SFA in 2014

Rising costs and falling income

Ofsted-related spending + capital projects = short-term worsening

UK in “Year 4 of a 9-year austerity plan” (IFS)

If colleges get into trouble

No formal lender of last resort but SFA & EFA may act

FE commissioner (or SFC commissioner)

Financial management

Addressing problems

Necessary to face up to difficulties promptly

Plan B needs to address the worst-case scenario

Understanding impact of competition & demography on 16-18 plans

Curriculum & finance need to be closely connected

Finance/analysis skills in senior teams & governing bodies

Governors need several channels of communication

Tackling low class sizes & duplication with other colleges

All parts of the budget need to be managed

Is this list right? Are there other issues?

Revenue funding 2014-15

Outcomes Things to note

EFA 16-18 -1% cash. +1% studentsFPG helps some colleges18 yr old mitigation helps others

Colleges advance funding FT studentsNew Maths/English conditionTighter sub-contracting rulesFree meal scheme in collegesTraineeships (out this week)No clarity on 2015-16 budget

Apprenticeships Recruitment down on 16-18 appsColleges say 19+ apps on targetApprenticeship spending maintained

New apprenticeship trailblazersTesting new rates in 2014-15A new on-line rate in 2015-16Employer routed funding by 2017?

Adult skills 17% ASB cut means a 23% skills cutColleges say ASB on target

No tolerance, no transitional protectionNo clarity on 2015-16 budget

Loans Colleges using c66% of facilitySFA has increased facilities by 27%

SFA’s loan growth plan for 2014-15FE loan development (out this week)

16-18 Funding in 2015-16

EFA faces a 16-18 cash crunch in 2015The size of the 2015-16 budget is unclear1.1% cuts for non-school DFE announced in 2013 Autumn StatementGrowth in 16-18 numbers plus the costs of extra FT students

Risk that there’ll be more cuts to rates or funded numbersAoC working with college and school assocations to protect budgets

SFA also faces a continuing sharp but unclear reduction in budgetHE overspends may affect money available to SFA

Autumn 2014 should be the point where decisions are finalisedEFA and SFA will be confirming allocations in spring 2015

Public spending after the election

Public spending 2015 to 2020

Years 7,8 and 9 of a 9 year plan Treasury plans to close deficit by 2018Lab/Lib Dem target is 2020

After the election, a spending reviewDecisions by December 2015Current plans for 2016-17£10 bil RDEL cut, £5 bil NI rise

For period 2015-16 to 2018-19£34 bil (8%) cut in RDEL Unprotected depts £80-100 bil

Pensions and budgets

Now By 2016

TPS employer 14.1% 16.48%

NI employer (approx)

10.4% 13.8%

Employer on-costs 26% 33%

Staff cost ratio 63% ?

Cost of employing a teacher to rise by 5% plus any payrise

TPS

Aim is to recover underfunding

Lower discount rate

High pay growth assumption

2015 reforms don’t save enough

Costs Colleges 1% of income

National insurance

DWP simplifying the rules

£5 bil extra NI pays pension costs

Costs Colleges 2% of income

Now By 2016

TPS members (avg) 9.6% 9.6%

NI employee (approx)

10.6% 12%

Pension income and pension tax

Tax limit on savingAnnual (AA) £40kLifetime (LTA) £1.25mil16* salary in DB schemeProtections (IP, FP)

State pensionSPA harmonises (2018)SPA 66 (2020) 67 (2028) Post-2015 service link to SPAState pension £7k/yr after 2016No contracting out Higher NI for colleges

Private pensionsMarch 2014 budgetAnnuities not compulsoryNew transfer restrictionsFuture impact on tax relief?

Defined benefit scheme

Defined benefit scheme

Funding from 2016 onwards

DFE budget between 2015 and 202010% growth in 11-16 pupil numbers (280k extra 11-16s)Costs of promises (eg free meals) and new institutions8% fall in 16-18 population (low point is 2018)83% of 16s in education, 10% in training or work, 7% NEET

EFA Funding from 2016 onwards

Lots of questions but answers unlikely until 2015

Funding allocationsLagged funding introduced in 2010. Are there alternatives?

Funding cuts?Formula Protection Grant ends by 2016-17Maths/English condition takes effect from 2016-17)

Policy changes?New A-levels (impact on retention calculations?)Development of Tech Levels and Substantial Vocational QualsEvolution of study programmes, traineeships, anything else?

SFA Funding from 2016 onwards

BIS budgetSome big cuts likely in BIS spending but this requires HE reform)Any political decision on HE fees will have an impact from 2017 19+ FE/Skills budget might be quicker to cutLEPs/Councils will continue to push for DWP & BIS budgetsExpansion of FE loans likely to take place in 2016

ApprenticeshipsCross-party support for apprenticeships (advanced & higher apps)Employer routed funding for apprenticeships by 2017 ?Issue of employer contributions to match £1.5 bil DFE/BIS spending

PoliciesSome parts of the country recovering; some have high unemploymentAll three parties have talked about under 25 benefit cuts (earn or learn)Opportunity to break the mould in higher education?

Longer-term funding trends

PoliticsThe 2015 vote and Coalition negotiations pretty importantEvents determine post-16 policy as much as ideologyPolitical views of ministers determine planning/market mix

Public spendingPost-2015 spending review may change tax/spending mixDemography underpins student number trends and budgetsThree things working against 16-18 education- Demography (more children now, more older people)- Economics (deficit reduction continues to be a priority)- Politics (future of UK discussions)No appetite to rebuild the size of government Spending likely to dip around 2018

Thinking about funding and finance

At a national levelImportant to stick to the facts and explain the consequencesNecessary to connect with people at an emotional levelBetter to find friends than enemies

For individual collegesPessimism can be contagious. College fortunes vary significantlyQuality countsOpportunities within £65 bil DFE+BIS revenue budgetProductivity improvements from IT only partly realised in education.Some government budgets continue to rise (eg FE and HE loans).Worth thinking about income generationVital to keep staff and governors onside

Known events

Before the summer breakLocal Growth Deals agreed in July 2014 (Parliament rises 22 July)Teachers Pension Consultation, 18 July 2014Financial plan (2013-14, 2014-15, 2015-16), 31 July 2014

AutumnScotland referendum, 18 September 2014Party conferences, 21 September to 8 October 2014PAoC annual conference, 18 - 20 November 2014Autumn statement, early December 2014

SpringBudget, mid March 2015Easter, 7 April 2015General election, 7 May 2015