Julian Gravatt AoC deputy chief executive South West FDs 5 March 2018 Julian Gravatt AoC deputy chief executive

Introduction “The Association of Colleges (AoC) is the national voice for colleges and exists to promote and support their interests. Everything AoC does is aimed at helping colleges deliver their purpose and to make an impact” What this presentation will cover National politics Government’s budget College finances Four big funding areas (16-18, adult education, apprenticeships, HE) Some college strategies

Public spending

Autumn budget (22 Nov 2017) Big picture One budget a year, each November Low growth = low pay growth = less tax Chancellor boxed in by Brexit, economic uncertainty and the government’s small majority Autumn budget involved a net “giveaway” (with no tax rises) Short-term politics determines the priorities (NHS, housing, Brexit preparations, universal credit, transport capital, freezing fuel and alcohol duty

What we gained in last 2 budgets Spring budget – spending increases each year until 2022 c£400 million/year for technical education Autumn budget –initiatives for 2018-19 and 2019-20 £20 million for T-level capacity development £48.5 million for GCSE resit teacher training and pilots to test bonuses £80 million (or more or less) for £600 Maths bonuses £12 mil for mayoral combined authority capacity (which will help them handle AEB devolution) Some teacher workforce initiatives in schools

Govt income & expenditure Income tax £175 bil VAT £125 bil Pensioners £106 bil NHS £117 bil Other benefits £115 bil Education £61 bil Local taxes £61 bil National Insurance £130 bil Defence £27 mil All other taxes £143 bil Debt interest £44 bil Other services £101 mil Corp Tax £54 bil Local expend £46 mil EU contrib £12 bil

Key recent spending decisions The 2015 spending review Tighter schools budget than before but rising Fixed 16-18 rate, fixed AEB, restructuring funds Apprenticeship levy; extension of student loans The decisions since summer 2016 National school formula by 2020 (£1.3 bil extra) Additional technical education funds (from 2018) Freeze on HE fee cap at £9,250

DFE budget – key components . Dedicated school grant Schools, High Needs and Early Years Block (£42 bil by 2020, of which £5 bil is for High Needs DFE introducing a national fair funding formula 16-18 grants £5.9 bil in 2017 Apprenticeships £2.5 bil by 2020 HE (and FE) Student Loans (£20 bil/yr by 2020) Adult Education Budget £1.5 bil by 2020 HE revenue £1.4 il in 2017

Public spending – what next? Difficult spending decisions deferred Treasury has cancelled plans to ask for departmental spending cuts in 2019-20 DFE and other budgets fixed until March 2020 Spending review completed in 12-18 months time Brexit date in March 2019 Some momentum for the national 16 to 18 funding campaign but more work needs to persuade the public and therefore politicians

Post 18 education and funding review

Post 18 education & funding review Process One year review, until spring 2019 In time to influence 2019 spending review and 2020-21 budgets Reports to PM, ChEx and Education Secretary Advice from a panel of 5 chaired by Philip Augar Opportunity for AoC/ Colleges to make a case

Post 18 education & funding review Constraints Students continue to pay with system being progressive and income contingent Continue with FE and technical reforms No cap on number of students who can benefit from post 18 education Support the industrial strategy Recommendations consistent with fiscal policies to reduce deficit and have debt falling as % of GDP

Post 18 education & funding review Opportunities? Alternatives to three year full time degree Rebalance choices between academic, technical and vocational at 18 (reverse the 17.5% cut at 18?) More higher level apprenticeships Maintenance support Changes to level, terms and duration of student and graduate contribution (changes to FE loans?) More transparency on funding

16-18 education

The EFA 16-18 funding formula Programme Cost Weighting Dis-advantage Area Costs (up to 20%) Student Numbers National Funding Rate per student Retention Factor ( ) Band Hours Total 5 540+ £4,000 4 (*) 450+ £3,300 3 360+ £2,700 2 280+ £2,133 1 < 279 Programme % Base 0% Medium 20% High 30% Specialist 60% Land-based 75% Total Programme Funding Disadvantage % 1 (GCSE Maths / English) £480 per GCSE 2 (27% most deprived) 8 to 33% extra

……plus extras (if applicable) Programme Cost Weighting Disadvantage Funding Student Numbers National Funding Rate per student Retention Factor ( ) Area Cost Allowance Total Programme Funding Large programme factor Advanced Maths Premium High Needs Students Bursaries & Free Meals

The Advanced Maths Premium Why? Smith maths review identified low 16+ take up of Maths even from those who achieve GCSE, grade C Smith identified funding as an obstacle People like simple policies, even wrong-headed ones Treasury dislike “deadweight” How? £600 for additional A-level or Core Maths enrolments Two subjects = two bonuses) Introduction in a complex and underfunded market Counting starts in September 2018

16-19 College Allocations – numbers rule

The overall T Level plan Two choices in future: academic or technical option Academic study programmes (incl applied general) Technical (T levels or apprenticeships) Digital, construction, education/childcare (2020) All 18 pathways by 2022 T levels set at Level 3 Some complicated grading proposals Proposals on transition year in development Qualifications under exclusive licensing T level panels

16-18 funding in 2018 and beyond Short term issues (2018-19) No change to the rate despite inflation being over 2% English and maths condition of funding 5% tolerance Adjustments to retention for 2 year courses Additional funds for work placements (£55 mil) The Level 3 maths bonus starts (for Level 3 Maths) Long term issues (early 2020s) Funding earmarked to support new T-level Is there funding for a rising population? Or other courses? The sustainability of the system on current funding

Adult education

College adult education funding College adult education (non apprenticeship) funding in £ millions reported in annual accounts

Skills devolution Skills deal implementation in 2019 Greater Manchester Liverpool City Region West Midlands Tees Valley West of England Cambridgeshire Greater London Not ready Sheffield City Region, North of Tyne

Adult education budget 2018-19 Underspends in last three years No guarantee of funding for over delivery in either 2017-18 or 2018-19 Very little change to 2018-19 rules because of skills devolution Mayoral combined authorities get legal responsibility but freedom over allocations, within existing data collection requirements and presumably with same funding rules to start with Review of LEP skills capital (local growth fund) Little change to or news on ESF until Brexit sorted

Apprenticeships

The great apprenticeship reform Everything changes New standards The levy (a tax on larger employers) with spending decisions rest with 20,000 employers Digital Apprenticeship Service (cost £12 mil) New funding formula with new rates Register of Apprenticeship Training Providers Procurement used to decide who trains apprentices in smaller employers (non levied)

Employer driven levy funding Large employer HMRC Levy (0.5% of payroll) Employer directs recipient and price Apprentice Digital Apprenticeship Service Registered Training Organisation Skills Funding Agency Payment on confirmation of training (ILR) and employer authorisation

Where are we now Significant financial issue for colleges Delay in availability of standards Levy payers using money for mid-career managers, procuring without using or doing nothing at all ESFA allocated £485 mil in non-levy contracts but colleges expect to deliver average £285k at risk 9% fall in college starts in 2017-18 50% of funding in 2017-18 related to carry-ins Forecast college income in 2018-19 < 2016-17 System effectively extends payment to c90 days AoC Apprenticeship and College Finance survey

Higher education

The higher education market Some market trends Rising % of 18 year olds going to HE Falling number of over 21s and part-time learners Falling 18-21 population and growth by lower end of higher tariff universities has squeezed other institutions More unconditional offers (1/3rd univs to 17% of apps) Great interest in degree apprenticeships but increase is from a very low base More emphasis on consumer rights of students

The college response College response Many colleges report falling FT numbers but few catastrophic reductions Competition from post-1992 universities problematic Many colleges have strong local, employment focused HE provision Following 40 mergers since start of 2016, there are more colleges with large HE cohorts Several colleges pursing degree awarding powers Institutes of Technology current point of interest OfS regulation will be a challenge in 2018

Institutes of Technology Policy in development Focus is Level 4 and 5, with preference for STEM Three way partnership (FE, HE, 2 employers) Two stage applications for IoT status and capital DfE had 100 expressions of interest and expect to allocate licences plus £170 mil in capital to c10 IoTs DFE not prescriptive on how IoTs can be structured but colleges have limited choice on structures Applications require considerable detail, pledges of cash from all parties and promise that IoTs will grow

Office for students A bureaucratic mountain to climb OfS replaces HEFCE on 1 April 2018 Applications for new register start - apply by 23 May 2018 if charging fees above £6,165 Initial registration requires work on consumer law compliance, student protection plan, governance etc TEF compulsory for providers with 500+ students OfS registration fees payable in 2019-20 AoC pushing for OfS reliance on ESFA and for recognition of role of colleges

College finances

College income & expenditure 16-18 £2.6 bil HE £0.5 bil Teachers £2.6 bil Supples and services £1.6 bil FE loans £0.1 bil Debt interest £0.1 bil High Needs £0.2 bil Other staff £1.1 bil ESF £0.1 bil Depreciation £0.4 mil Apprentices £0.6 bil Fees and other £1.1 bil AEB £0.9 bil £6.1 bil Income 83% public or is it 63%? 62% staff cost ratio 1% surplus but higher EBITDA

FE College funding (£ millions)

The college insolvency regime A new factor – but don’t panic Government reluctant to bail out colleges Risk of disorderly insolvency if law unclear Special administrator duty to protect learners as well as creditors Technical and Further Education Act 2017 Implementation by end of 2018 Risk for governors in financially weak colleges but only if there is clear negligence DfE plan to introduce new pre-statutory Independent Business Review process

Multiple regulators Special Office for Students FE EFSFA Ofsted Administrator (2018) FE Commissioner EFSFA Office for Students (2018) College Ofsted LGPS Fund External auditor The College’s bank

Intervention – where are we now After 37 area reviews, 42 college-to-college mergers and 18 SFC conversions…. 35 colleges have financial notices to improve 7 colleges are rated inadequate by Ofsted The colleges in the intervention category have plans to turn things around The restructuring fund deadline is September The FE commissioner has a larger remit Colleges will continue to get into trouble but the current system penalises every mistake

Pensions

College staff and pensions Eligibility Teachers employed in a college eligible for TPS All other college staff eligible for LGPS Subsidiary companies Staff not eligible for TPS (unless seconded in) Staff eligible for LGPS if company is admitted Support staff Teachers

Colleges part of national systems Support staff Teachers College TPS 91 LGPS funds LGPS Employer Range 11-30% Average 17% Next change 2020 TPS Employer 16.48% Could rise in 2019 News by April 2018 Support staff Income-related Contributions 5.5-12.5% Income-related Contributions 5.5-12.5%

Do colleges have an alternative? TPS 1 million teachers in TPS High on-costs (16.48%) but no employer liability Subsidiary company staff cannot access TPS apart from via rarely used designation procedure LGPS Rising costs and liabilities. Exit very expensive Subsidiary companies can be inside or outside Colleges able to offer an alternative scheme but must be very careful over implementation

Implementing an alternative? Some tips Employ new support staff via subsidiary company on different terms with access to a DC scheme Company needs to be part of VAT group with college and with 2 way service level agreement Staff/recognised unions need to be informed and consulted Main aim will be to reduce future liabilities but annual savings may be possible (>1% of income within 2 years) Needs careful handling given rules on advice

Planning

Anticipating change 2015-16 Spending set by Coalition (several cuts) 2016-17 2015 Spending review (stabilisation on core budgets, promise of future reform) 2017-18 Apprenticeship levy started 2018-19 Working through of reforms. A hard year 2019-20 Some big changes (Brexit, new HE regime, Skills devolution, College insolvency regime) 2020-21 Budgets shift following next spending review

AoC Policy Groups Teaching Learning Assessment Higher Education Curriculum Reform AoC Board Quality and Accountability Academic & SFC Devolution & Responsiveness Governors Council Finance & Sustainability English and Maths Colleges Directors Finance AoC Group Boards Employment Apprenticeships Technology SEND World Skills International Mental Health Sector Vision

Into the 2020s Brexit (2019), then a transition, then what? This government in power until 2022 unless it falls Post 18 review + next spending review -> 2020-21 UK needs to compete and improve productivity Desire to develop alternatives to 3 year FT degree Rising population of 16-24 year olds in 2020s New technical education system from 2020 onwards New direction for apprenticeships. More planning? Lots of opportunities for those who can survive

Julian Gravatt AoC deputy chief executive Any questions? Julian Gravatt AoC deputy chief executive