1. Annual conference Funding forum
Julian Gravatt– deputy chief executive

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

3. The wider context

4. 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

5. 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

6. Autumn budget

7. 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)
budgets barely changed but now fixed
Funding now fairly predictable for next 12 months

8. 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

9. AoC short-term budget proposals
Turned down
16-18 funding rate £4,050 in
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

10. 16-18, apprenticeships, adult education etc
for

11. 16-to-18 education in 2019-20 What changes
T-levels take effect in (c50 pilot institutions)
More industry placement capacity development funds available in (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

12. 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

13. 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

14. 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

15. College finances

16. 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

18. 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

19. Low surpluses– 4/5ths below benchmark

20. 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)

21. 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%)

22. 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

23. The next 13 months
2018/9
December 2018 – governors approve 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 budgets
2019/20
September – TPS contributions rise
November – Spending review published (TBC)
December - governors approve accounts

24. Funding in the 2020s

25. 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
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 and (IFS)
Big pressures in local govt, social care, policing, prisons
Education biggest unprotected spending budget

26. 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

28. 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

29. Student loan accounting
£ billions
2018-9
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

30. 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

31. Teacher pensions

32. TPS employer contribution (%)

33. 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

34. 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

35. 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
DfE Teacher Pay Grant in
Uncertainty on 2020 funding until Nov 2019
Pressure on staff costs, pay and jobs
An issue when colleges bid for funds

36. 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

37. Concluding thoughts

38. 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

39. 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

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

41. 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

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