AoSEC Principals’ Event Tuesday 7 th July 2015 Martin Doel: AoC Chief Executive Richard Atkins: AoC President 2014/15 & Principal, Exeter College

Outlook for Colleges The Government: a) the mandate b) the personalities c) the policies Colleges: a) funding and finance b) options for the new government c) how will college finances improve? Working with Government

The Government Personalities Nicky MorganNick BolesSajid Javid

The Government Personalities Jo Johnson Matthew Hancock Greg Clark

The Government Mandate Personalities Policies

The Government Personalities Policies Apprenticeships Young unemployed Devolution Trade Unions Schools Money

The Government Personalities Policies Apprenticeships and Skills 3m apprenticeships

Source: LSect

The Government Personalities Policies Apprenticeships and Skills 3m apprenticeships Remove ‘low value classroom based’ courses Degree apprenticeships National colleges

The Government Personalities Policies Apprenticeships Devolution Northern Powerhouse Elected mayors Area reviews?

The Government Personalities Policies Apprenticeships Devolution Young unemployed Cap benefits Earn or learn Apprenticeship, training or citizen service

The Government Personalities Policies Apprenticeships Devolution Young unemployed Trades Unions 50% turnout required 40% threshold of those entitled to vote Mandate time limited

The Government Personalities Policies Apprenticeships Devolution Young unemployed Trades Unions Schools Coasting schools/Regional Schools Commissioners JCP Advisor in schools Protect new free schools and a UTC ‘in reach of every town’

The Government Personalities Policies Apprenticeships Devolution Young unemployed Trades Unions Schools Money Balanced budget by % cut for unprotected budgets

Political Timetable Summer 2015 General election (7 May 2015) Formation of new government (8 May 2015) Parliament returns (18 May 2015) Queens speech (27 May 2015) Budget (8 July 2015) First legislation (eg Education, Welfare, Tax, EU Referendum bills) Autumn 2015 Ministerial decisions on big issues Changes in agencies? Ofsted? FE commissioner? SFA? HEFCE? Spending review (by November 2015) HE recruitment with no student number controls College responses to the new climate/new funding

The bigger spending picture Government finances: Deficit to be closed this decade;  via tax income  plus spending cuts Offsetting extra spending on;  pensions, debt interest (AME)  NHS (protected DEL) Conservative plans: Budget surplus by 2018 No increase in headline tax rates £30 bil in fiscal consolidation £5 bil tax measures £12 bil benefits & tax credits £13 bil departmental cuts Public finances (in £ billions, constant cash)

The Emergency Budget The 2015 budget (8 th July) Budget will update tax & spending forecasts Legislation to implement tax promises Start of 2015 spending review Greater clarity on departmental spending plans Departmental spending£ bil2016 to 2018 Protected (NHS, Schools, DFID)160+5? Fairly difficult to cut (Defence, rUK)700 Post 16, Police, Local Govt, the rest86-18 (20%)

College Income Colleges SFA FE College income (£ millions) 233 Colleges EFA 2,823 (44%) SFA 1,734 (28%) Other 1,756 (28%) Total 6,396 Surplus 34 Sixth form colleges (£ millions) 93 Colleges EFA 822 (95%) Other 42 (5%) Total 864 Surplus 20 EFA

Funding of English Colleges Six areas: 16 to 18 education Adult skills budget Apprenticeships Devolution of budgets Further education loans Higher education

(1) education – DFE Budget DfE funds 4.3 mil primary and 2.7 mil secondary pupils via EFA and LA. Money based on pupil numbers & characteristics EFA funds 1.3 mil year olds via a national formula. £4,000 for a full-time student; less for a part-timer; more for some courses (10%); extra for two types of disadvantage (English/Maths + postcode); a deduction for withdrawals; extra for large programmes £ bil Schools budget All other DFE 5.5 DFE RDEL53.7

(1) education – students and funding StudentsInstit16, FTPTH/Ne eds TotalAverage Colleges ,274 Schools2, Special Schools Comm & Charit Total3, , £ millionsProgOf which Disadv H/NBursary Free Meals Total Colleges3, ,616 Schools2, ,121 Special Schools Comm & Charit Total5, ,193

(1) Education – Developments; In Funding driven by student data (this year’s recruitment) FE college recruitment down c3% 14/15 Funding down in 2015/16 English and Maths funding condition a significant challenge In and beyond Big question - will be protected at all Forecast that population will fall by 8% from 2015 to 2020 Savings simply by maintaining not raising participation % EFA will make some small technical savings in Further cuts either to rates or factors? Adjustments to lagged number system? Local commissioning? It takes time to adjust any formula involving schools

(2) SFA funding – BIS budget; £ bil HE & Science FE2.9 All other BIS2.4 BIS RDEL13.2 BIS funds 1m undergraduates via HE student loan scheme (£40,000+ in student debt with a forecast 45% write-off) Student loan outlays £14 billion a year and rising SFA funds 2m adults over 19 and 800,000 apprentices (aged 16 upwards) via a several different national formulae

(2) SFA funding – where does it go? £ millionsTotal 19+ Apprenticeships Apprenticeships732 Apprenticeship grants for employers 131 Apprenticeships1,487 £ millionsTotal 19+ further education1,328 ESF funding via SFA250 Community learning210 Offender learning financial support127 Employer ownership (est)70 ESOL mandation50 Other SFA, A/Year2,374 Colleges in Total% 19+ FE Apps Apps27736

(2) SFA funding developments; In SFA funding letter out very late Overall spending (including capital and loans) cut by 5% Apprenticeship funding protected “Other ASB” (adult further education ) cut 24% in Plan to simplify the rules slightly in In and beyond What happens to SFA funding depends partly on HE 20% cuts imply End of HE maintenance grants Significant cuts to ASB ‘of which is not apprenticeships’ Contradictory policies about how to route the FE budget Decisions may be made fairly quickly

(2) Several options for SFA funding Several options for reform of SFA funding: 1.Devolution of budgets 2.Apprenticeship funded via employer vouchers (“discount codes”) 3.Expansion of FE loans 4.Action to reduce numbers under 21 on benefit The bigger the reform, the less things change in the short-term!

(3) Devolution Strong push for local control of skills LEPs have ESF & skills capital funding #DevoManc 6 Metro areas + London (40% popul) The 39 LEPs? 152 Counties, Unitaries & Boroughs Scope of devolution unclear All 16+ FE? 19+FE less Apprentices? Could happen in stages Strategic Area Reviews?

(4) Apprenticeships In Apprenticeships a priority (“blue collar conservatism”) £1.6 bil apprenticeship budget (16-18, 19+) is ring-fenced Expansion 2009 to 2013; consolidation since 2013 Concern that college apprenticeships are reliant on sub-contracting Overhaul of qualifications (295 trailblazers in place by July 2015) In and beyond Action to expand apprenticeships (incl. marketing campaign) “3 million apprentices” = 50% growth Transition to new qualifications Apprenticeship vouchers Opportunity in the chaos for colleges to develop new programmes?

Likely funding changes over next 2 to 3 years AreaMy best guess fundingContinuing slices from the budget SFA fundingMore cuts, more apprentices, more devolution ApprenticeshipsGrow, grow, grow plus big system reforms FE loansFE loan extension but possibly not until 2017 HEDepends on how the new HE market works out CapitalLEP skills capital, possibly a re-capitalisation fund

Sources: GFE Finance records 2008/09 to 2013/14 (adjusted); Financial plans 2014/15 to 2015/16

 29 colleges out of 242 (12%) are now rated as inadequate for financial health – increased from 15 (6%) in 2009/10  11 of the 29 were new cases from the review of financial statements for 2013/14  2 of the 29 have now merged with other colleges in April following intervention  Deterioration in financial health driven by the reduction in cash based profitability first and now reduced liquidity  New measures of financial health may see increased numbers assessed as inadequate in 2015/16 Key factors affecting profitability: Cohort decline on year olds Increased competition – new provision in schools, academies, free schools, UTCs etc. Reducing public funding for adults Drive to increase investment from other sources e.g. growth in 24+ Advance Learning Loans Changes to financial contributions from individuals (adult learners) Prioritising funding for apprenticeships and traineeships Substantial increase in employer pension and NI contributions OFFICIAL Financial health of General FE Colleges

 Sector borrowing has grown from £1.4bn (2009/10) to £1.6bn (2013/14) to support capital investment  Income has reduced threatening serviceability – borrowing to income has increased from 20% to 25%  22% of colleges had borrowing over 40% of income in 2013/14 – the FE Commissioner has suggested this as a warning sign  The number of colleges borrowing has increased – 25% of colleges had no borrowing in 2009/10; 15% in 2013/14  The average level of borrowing for those with some borrowing has increased marginally from £7.1m in 2009/10 to £7.6m in 2013/14  Colleges built up cash reserves but these are being used to support capital and cash deficits  Lending to the sector is dominated by Barclays and Lloyds – approx. 70% as sole lender in 2012/13; 12% was a mix of banks; Santander had less than 10%  Banks are increasingly intervening due to covenant breaches – the sector risk profile has also reduced the appetite to lend – increased reliance on Government for liquidity support for cash crises OFFICIAL Borrowings and banking across General FE Colleges

These charts show the trends in financial health, using un- moderated auto-score data from the 2014/15 financial plans submitted July General Further Education Colleges (GFEC) Sixth Form Colleges (SFC) Moderation could, in a small number of cases, lead to changes in these scores (eg for capital reasons) Headlines to note:  Both SFCs & GFECs have an overall declining trend in outstanding financial health  Nationally, aggregate GFEC forecasts show an operating loss in 2013/14 for the first time ever with an aggregate deficit of £64m  43% of GFECs are forecasting an operating deficit for 2013/14  Aggregate SFC forecasts show a reduction in surpluses from £54m in 2012/13 to £30m in 2013/14  Aggregate SFC cash reserves drop from £224m in 2012/13 to £176m in 2014/ /16 will see significant downward changes in funding (apprenticeships, adult, removal of protections) Colleges’ own forecasts are known to be subject to optimism bias… Falling demographic up to 2019 – already some colleges’ student number forecasts for 2014/15 are proving 982) This time last year, 15 GFECs were forecasting 2013/14 financial health inadequate – the financial plans received this July confirm there are 27 During 2013/14, no SFCs had forecast inadequate financial health – yet two financial notices to improve were issued in May 2014 (a further two are likely in October) … so, 2014/15 and 2015/16 outturns will be worse than figures suggest. What does the latest college financial health analysis now show us?

How colleges will improve their finances Some or all of the following: 1.Better government policy (funding properly matching the task) 2.Cost reduction (to bring budgets back into balance) 3.Property sales to release cash (only open to some colleges) 4.Relentless focus on student/employer demand and need 5.Outsmarting the competition 6.Strong, positive, realistic leadership 7.Consolidation of colleges and training providers

What’s on the Minister’s mind? 14 or 16? UTC? Colleges; have we got the right mix? Reorganisation of colleges; who should decide? Qualifications; have we got the right ones?

ACTION / POLICIES ESSENTIAL PRECONDITIONS END STATE ADEQUATEFUNDING A pattern of effective colleges responding to (local) economic need with a dual mandate The creation of 3 million high quality apprenticeships An end to intergenerational unemployment A rejuvenated higher technical & professional education system A more productive economy with higher wages and greater individual prosperity WORKING WITH A GOVERNMENT AGENDA STABILISESIMPLIFYSUSTAIN An employer led skills system that is market-driven A pattern of effective colleges responding to (local) economic need with a dual mandate

ACTION An end to intergenerational unemployment FE Commissioner STABILISE SIMPLIFY SUSTAIN

ACTION / POLICIES ESSENTIAL PRECONDITIONS END STATE STABILISESIMPLIFYSUSTAIN A pattern of high quality cost effective, open access tertiary and sixth form colleges ADEQUATEFUNDING An effective careers guidance and education system Pathways and support to young people who have failed to achieve benchmarks by age 16 Rigorous and respected technical and academic qualifications for year olds Accurate assessments of value added performance taking account of student starting points An education system that promotes excellence and opportunity for all WORKING WITH THE GOVERNMENT AGENDA Best use of scarce resources in dealing with demographic trends

Two Alternative Futures (1) A lot less Down NTIs increased Down Imposed Externally driven AUTONOMY LOST (SCOTLAND)

Two Alternative Futures (2) Less but not quite as much Mediated Stabilised Enabled Influenced Internally driven AUTONOMY RETAINED (WALES)

Allies and Alliances Allies  MPs  Peers  LAs/LEPs  Think tanks  Employers  Media Alliances  ASCL and Academy Associations  College Groups  AELP  Wider Sector

QUESTIONS?

Questions Consolidation and Specialisation  Collaboration and competition  Specialisation: 4/5 or 3/4/5  Area reviews  Outcome agreements Defining Colleges  Adaptive layer? or  Serving an economic community?