Annual conference Funding forum Julian Gravatt– deputy chief executive

College funding forum What I’ll cover The wider context The Autumn budget Funding issues in 2019-20 College finances Public spending after 2020 Student loans and teacher pensions What I suggest you need to do

The wider context

The last four years (2015,16,17 & 18) What did you predict? Conservatives: victory in ’15, very divided now Labour: 30% vote in ‘15, 40% in ‘17 under Corbyn UK out of EU in ‘19 on a 17 million vote UK slow growing economy but low unemployment A levy used to fund apprenticeships from ’17 Asymetric adult education devolution from ‘19 The T-level plan New A-levels & GCSEs landed with few problems Loss of confidence in universities

What’s next? What we know or can guess Brexit ‘19 but transition until start of 2021 End of free movement, end of EU home fee status Public finances will be tight Skills devolution will mean changes Ministers will tinker with apprenticeships T-levels will start slowly ONS likely to partly reclassify student loans Post-18 review will recommend change

Autumn budget

The Autumn budget (29 Oct 2018) What happened A fiscal windfall Unlike GDP, public finances better than expected No net tax rise needed to fund 5-year NHS deal Public sector pension discount rate reduced Additional spending on roads (potholes) and schools capital (including sixth form colleges) 2019-20 budgets barely changed but now fixed Funding now fairly predictable for next 12 months

AoC proposals for spending review For 2020 and beyond An education spending target (as % of GDP) Higher 16-to-18 funding per student (up 5% a year) A new all-age Level 3 entitlement A new higher technical offer A national retraining scheme Grants not procurement in allocating funding An education workforce strategy

AoC short-term budget proposals Turned down 16-18 funding rate £4,050 in 2019-20 Guarantee non-levy apprenticeship budget Promised Fund exceptional teacher pension increase Capital grants for technical equipment (Yes) Let’s see Redeploy adult education underpend on AEB Set up a higher technical development fund Standardise ESFA payment profile Extend the restructuring facility for a year

16-18, apprenticeships, adult education etc for 2019-20

16-to-18 education in 2019-20 What changes T-levels take effect in 2020-21 (c50 pilot institutions) More industry placement capacity development funds available in 2019-20 (based on R04) Extra Teacher Pension Scheme grant What doesn’t change Same formula for revenue funding Same rates (despite CPI running at 2%) 16-to-18 population down 2% in 2019

Apprenticeships in 2019-20 What changes Co-financing rate 5% Transfer of 25% of levy funds Unused levy start to expire from May 2019 IFA continuing to adjust/reduce framework rates Smaller employers due to get accounts in 2020 What doesn’t change The new system put in place between 2015 and 2017 Budget run on 12-month April to March cycle

Adult education budget in 2019-20 What changes Devolution of c50% of adult education budget to Greater London and six Mayoral Combined Authorities (Greater Manchester etc) in 2019 Procurement for contracted and out-of-area AEB More monitoring by devolved authorities (more staff) Postcodes now matter What doesn’t Non-devolved AEB ILR, funding entitlements, eligibility rules

Adult education budget (£ mils, est) Non devolved 651 GLA 310 WM 105 GM 90 LCR 55 WE 17 TV 24 CP 12 AEB income (£millions) Devolved ESFA  Total Local colleges (62) 342 42 384 Out-of-area colleges (168) 81 401 482 All colleges (270) 423 443 866 Other providers 184 298 All 607 741 1,350

College finances

College finances 16-18 £3.1 bil HE £0.5 bil Teachers £2.4 bil Supples and services £1.9 bil FE loans £0.1 bil Debt interest £0.1 bil High Needs £0.2 bil Other staff £1.8 bil Fees £0.3 bil Depreciation £0.5 mil Apprentices £0.6 bil Catering etc £0.5 bil AEB £0.8 bil £6.7 bil Income 83% public (46% 16-18) 63% staff cost ratio 0.1% surplus Higher EBITDA Grants (incl ESF) £0.5 bil

Staff/income ratio vs benchmark Colleges are under more financial scrutiny but the underlying financial issue is underfunding and the fact that between three-fifths and two-thirds of college income goes on staff. There is upward pressure on staff costs but no extra funding from government

Low surpluses– 4/5ths below benchmark

Income and expenditure 2019 will be more difficult than ever Fewer 16-to-18 students Fewer apprentices Adult education budget partly devolved HE intense competition for fewer students No increases to funding rates Rising staff costs (staff turnover 17%) Higher teacher pension contributions Extra duties (funding admin, careers, OfS subs)

Capital financing and spending Time for a rethink Capital spending down by a factor of 3 in 4 years Banks lending down. 2:1 model does not work Grants dependent on LEPs. DfE prioritises schools College cashflow still positive (EBITDA 4-5%)

The college insolvency regime DFE ESFA Bank (s) LGPS Fund Other creditor Special Administrator 14 day window Administrator DfE intend to use a pre-statutory Independent Business Review Bank, LGPS and creditors likely to be better off if they do not initiate the statutory procedure College Duty to protect learners as well as creditors

The next 13 months 2018/9 December 2018 – governors approve 2017-18 accounts January – start of the college insolvency regime March – typical cashflow low point April – a difficult month if there’s no Brexit deal July – governors set 2019-20 budgets 2019/20 September – TPS contributions rise November – Spending review published (TBC) December - governors approve 2018-19 accounts

Funding in the 2020s

The 2019 spending review What we know Won’t start before March 2019, must end by November UK/EU negotiations on post-Dec 2020 deal Current plan narrows the deficit up until 2023-4 5 year NHS deal: budget up 3.4%/year in real terms Protection for pensions, NHS, defence, int’l aid Figures imply small real-terms cut to unprotected budgets between 2019-20 and 2023-4 (IFS) Big pressures in local govt, social care, policing, prisons Education biggest unprotected spending budget

Education spending issues The recent record Funding per pupil (age 5-16) protected 2010 to 2020 Rising pupil numbers Expansion in early years 24% drop in funding per student at age 16 Student loans used to protect higher education Some immediate issues in early 2020s 11% rise in secondary pupil numbers 2019 to 2024 8% rise in 16-to-18 (if participation % constant) Student loan accounting may change

16-to-18 education early 2020s A £6.6 billion revenue budget Widespread agreement that 16-to-18 underfunded 266 colleges, 2,200 sixth forms (many small) T-level numbers due to rise each year; with promise of more hours and funding per student Work on transition year Applied general review DfE may find it politically hard to act even if it works out what needs to happen

Student loan accounting £ billions 2018-9 2019-20 2020-1 2021-2 2022-3 New loans 17.6 18.5 19.2 19.9 20.7 Repayments (2.0) (2.1) (2.2) (2.4) (2.9) Accrued interest 4.5 5.5 6.1 6.9 7.8 Big uncertainty in post-18 education ONS reviewing student loan accounting (17 December) Are student loans loans? Is accrued interest income? Could increased reported education spending Might necessitate controls on loan outlays, eg lower fees or more planning

Post-18 education early 2020s Even more complicated Post-18 review may change fee & loan arrangements for higher education (including some lower fee caps?) Desire for more Level 4 & 5 courses Devolution means DfE no longer has a single FE system Desire for a National Retraining Scheme Shared Prosperity Fund seems likely to merge ESF into Local Growth Funds, under LEP control Immigration plans are to end EU free movement and introduce skills-based controls Further apprenticeship reform likely after 2020

Teacher pensions

TPS employer contribution (%)

Current public sector valuations New ER rate Improved benefits because of the cost cap floor breach ER rate (no cost cap) Within cost cap Current ER rate The lower discount rate (CPI+2.4% not CPI+3%) Mortality Lower payrises Other adjustments Adapted from a LCP presentation

TPS contribution rate change Employer rate now 16.4% Changes in financial assumptions + Impact of longevity change - Change in past service adjustment Various other changes Employer rate, no cost cap c19.5% Cost cap rectification Cost of deferral to September 2019 Employer rate, provisional c23.5% A 40+% rise in costs Notes: The 2018 TPS valuation is provisional and confidential which is why detailed figures are not included in this table

The impact on budgets Teacher £30,000 salary On costs Now Future Extra National insurance £4,140 Pension £4,945 £7,050 +£2,105 Total on costs £39,085 £41,450 Teacher £30,000 salary Impact for a teacher earning £30,000 On-costs rise by £2,105 (7% of their salary) to £11,450 (38%) College £20 mil budget Variety of impacts Extra costs of £400,000 in 2019-20 DfE Teacher Pay Grant in 2019-20 Uncertainty on 2020 funding until Nov 2019 Pressure on staff costs, pay and jobs An issue when colleges bid for funds

College staff and pensions Teachers Support staff Eligibility TPS – Employed teachers LGPS - All other college staff Subsidiary company staff Not eligible for TPS Only eligible for LGPS if company is admitted Regulations TPS and LGPS regulations College Subsidiary Company

Concluding thoughts

Lots of organisations try to tell colleges what to do…. Ofsted FE Commissioner Office for Students Home Office College Local government Education & Skills funding agency Awarding bodies External auditor The College’s bank

Assess, act, reassess, act again.. Colleges need to chart their own course Everyone expects more New agents (eg levy payers, metro mayors) ESFA less powerful, more rule-based Westminster also less powerful A bigger national focus on skills for work Intervention best avoided Solvency pre-condition for everything else

What governing bodies should do Some suggestions Future strategy Quality Finances (including sufficient cashflow) Partnerships Relationships – key civic, local, regional Reputation of the college

What college leaders should do Campaign for better but play the cards you have Act on what students & employers want & need Higher group sizes Invest in course development Protect staff pay – prioritise over jobs & pensions Technology to support administration of learning A more commercial approach to use of space Efficiency – and savings – in administration Aim to take your staff with you Explain, listen and explain

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