AoC Yorkshire and Humberside College funding and finance issues 19 June 2014 Julian Gravatt, Assistant Chief Executive, AoC

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 % FEFC, EFA+SFA 2,3645, % Other1,1501,943+68% Income3,5087, % Staff2,3904, % Supplies1,1252, % Expendit3,5157, % Surplus(7)(58) % Diversity32%26% % Staff cost68%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 2012 GDP deflator up 51% in same period

College accounts

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 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 (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 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 OutcomesThings to note EFA % cash. +1% students FPG helps some colleges 18 yr old mitigation helps others Colleges advance funding FT students New Maths/English condition Tighter sub-contracting rules Free meal scheme in colleges Traineeships (out this week) No clarity on budget ApprenticeshipsRecruitment down on apps Colleges say 19+ apps on target Apprenticeship spending maintained New apprenticeship trailblazers Testing new rates in A new on-line rate in Employer routed funding by 2017? Adult skills17% ASB cut means a 23% skills cut Colleges say ASB on target No tolerance, no transitional protection No clarity on budget LoansColleges using c66% of facility SFA has increased facilities by 27% SFA’s loan growth plan for FE loan development (out this week)

16-18 Funding in EFA faces a cash crunch in 2015 The size of the budget is unclear 1.1% cuts for non-school DFE announced in 2013 Autumn Statement Growth in numbers plus the costs of extra FT students Risk that there’ll be more cuts to rates or funded numbers AoC working with college and school assocations to protect budgets SFA also faces a continuing sharp but unclear reduction in budget HE overspends may affect money available to SFA Autumn 2014 should be the point where decisions are finalised EFA 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 2018 Lab/Lib Dem target is 2020 After the election, a spending review Decisions by December 2015 Current plans for £10 bil RDEL cut, £5 bil NI rise For period to £34 bil (8%) cut in RDEL Unprotected depts £ bil

Pensions and budgets NowBy 2016 TPS employer14.1%16.48% NI employer (approx)10.4%13.8% Employer on-costs26%33% Staff cost ratio63%? 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 enoug h Costs Colleges 1% of income National insurance DWP simplifying the rules £5 bil extra NI pays pension costs Costs Colleges 2% of income NowBy 2016 TPS members (avg)9.6% NI employee (approx)10.6%12%

Pension income and pension tax Tax limit on saving Annual (AA) £40k Lifetime (LTA) £1.25mil 16* salary in DB scheme Protections (IP, FP) State pension SPA harmonises (2018) SPA 66 (2020) 67 (2028) Post-2015 service link to SPA State pension £7k/yr after 2016 No contracting out Higher NI for colleges Private pensions March 2014 budget Annuities not compulsory New transfer restrictions Future impact on tax relief? Defined benefit scheme

Funding from 2016 onwards DFE budget between 2015 and % growth in pupil numbers (280k extra 11-16s) Costs of promises (eg free meals) and new institutions 8% fall in 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 allocations Lagged funding introduced in Are there alternatives? Funding cuts? Formula Protection Grant ends by Maths/English condition takes effect from ) Policy changes? New A-levels (impact on retention calculations?) Development of Tech Levels and Substantial Vocational Quals Evolution of study programmes, traineeships, anything else?

SFA Funding from 2016 onwards BIS budget Some big cuts likely in BIS spending but this requires HE reform) Any political decision on HE fees will have an impact from FE/Skills budget might be quicker to cut LEPs/Councils will continue to push for DWP & BIS budgets Expansion of FE loans likely to take place in 2016 Apprenticeships Cross-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 Policies Some parts of the country recovering; some have high unemployment All three parties have talked about under 25 benefit cuts (earn or learn) Opportunity to break the mould in higher education?

Longer-term funding trends Politics The 2015 vote and Coalition negotiations pretty important Events determine post-16 policy as much as ideology Political views of ministers determine planning/market mix Public spending Post-2015 spending review may change tax/spending mix Demography underpins student number trends and budgets Three things working against 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 level Important to stick to the facts and explain the consequences Necessary to connect with people at an emotional level Better to find friends than enemies For individual colleges Pessimism can be contagious. College fortunes vary significantly Quality counts Opportunities within £65 bil DFE+BIS revenue budget Productivity improvements from IT only partly realised in education. Some government budgets continue to rise (eg FE and HE loans). Worth thinking about income generation Vital to keep staff and governors onside

Known events Before the summer break Local Growth Deals agreed in July 2014 (Parliament rises 22 July) Teachers Pension Consultation, 18 July 2014 Financial plan ( , , ), 31 July 2014 Autumn Scotland referendum, 18 September 2014 Party conferences, 21 September to 8 October 2014P AoC annual conference, November 2014 Autumn statement, early December 2014 Spring Budget, mid March 2015 Easter, 7 April 2015 General election, 7 May 2015