1. AoC Conference 2014 Funding forum Long-term trends, short-term issues Julian Gravatt, AoC Assistant Chief Executive 20 November 2014 Slides available at http://www.aoc.co.uk/funding-and-corporate-services/ funding-and-finance/reports-and-presentations

2. 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 Some longer-term trends if we can discern them Twenty years of funding, what we’ve learnt

3. Long-term trends, short-term issues What this presentation covers Politics Economics Issues in the DFE & BIS budget Implications for colleges

4. Politics – where we are now Uncertainty 24 weeks before the 2015 general election Coalition governing parties in open disagreement SNP, UKIP, Greens both doing well enough in polls to gain more MPs Electoral system efficient at converting Labour votes into seats Result currently difficult to call Timetable Autumn statement, 3 December 2014 Budget, mid March 2015 Easter, 7 April 2015 General election, 7 May 2015 Coalition negotiations, May 2015 Queen’s speech & Spending review, Summer 2015

5. Politics and funding Before the election General avoidance of boat-rocking Decisions on 2015-16 allocations made before the election Departmental budgets fixed up 31 March 2016 Autumn statement may add to, subtract from or devolve budgets After the election Post-election 2015 spending review (budgets from 2016-17 onwards) Spending likely to dip around 2018 Economics, politics & demography all imply post-16 education cuts

6. Big recession in 2008; shaky recovery in 2011 & 2012 Growth in 2013 and 1H2014; uncertainty about future UK economy

7. Inflation spike in 2011 (higher oil & commodity prices) Some concern now in 2014 about deflation Inflation now below target

8. Unemployment peaked at 2.6 million (8.5%) in 2011 High employment levels – self-employed & older workers Unemployment below 2 million

9. Interest rates expected to rise but now not until 2015 Expectations about official interest rates

10. The economy The current challenge The UK has had an economic recovery for more than a year Not a very balanced recovery Unemployment has fallen but lots of low-quality employment Fears that economic growth may falter during 2015 The economy and public finances UK govt tax income has grown by less than the economy Deficit reduction from 2009 to 2014 is not considered sufficient Politicians interested in tax cuts to tackle living cost issues

11. Government finances Deficit closed this decade Tax income rises > spending Spending in some areas rises e.g. pensions, interest Revenue DEL static in cash terms Protected spending (eg NHS) rises OBR: 30-40% cuts in unprotected The bigger spending picture x Public finances (in £ billions)

12. Tax rises, tax credits and benefit changes all used before 2015 Revenue DEL reductions after 2015 Policy measures taken by the Coalition

13. Plans assume RDEL as % of GDP falls by 23% from 17.5% in 2014-15 to 14.2% in 2018-19 Spending as % of GDP (current plans)

14. Policy measures taken by the Coalition OBR forecasts that unprotected DEL spending falls by 32% from 8.6% of GDP in 2014-15 to 5.9% in 2018-19. Defence spending likely to stay near 2% of GDP

15. Public spending – where are we now Political uncertainty 24 weeks until the 2015 general election Hard to predict who will run the government after 7 May 2015 Public spending Changes may be made in the Autumn statement or budget 2015 spending review (by November 2015?) sets budgets after 2016 OBR says current plans imply 30-40% cuts in unprotected depts

16. The DFE budget after 2015 DFE’s cash crunch: too many schools, pupils & promises DFE budget £53.7 bil (2014-15) of which £41.2 bil is spent on schools 80% of school income spent on staff On-costs up 5% in 2015-16 (£0.9 bil cost for schools) 2015 to 2020: 11-16 pupils +10%

17. 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 15 year recovery period Lower discount rate High pay growth assumption 2015 reforms don’t save enoug h Costs Colleges 1% of income National insurance DWP simplifying state pension Removal of an NI relief £5 bil extra NI Costs Colleges 2% of income NowBy 2016 TPS members (avg)9.6% NI employee (approx)10.6%12%

18. 16-18 funding in 2015-16 In 2015-16 16-18 funding letter out (12 pages) Same systems (rates * lagged numbers * historic funding factors) ILR data vital (R15 in October, R04 in December) Funding factors in December and allocations by February 2015 In 2016-17 and beyond Big question whether 16-18 is protected or not Forecast that 16-18 population will fall by 8% from 2015 to 2020 Savings from end of Formula Protection & start of funding condition Further cuts either to rates, numbers or factors Plausible to anticipate 2% (c£150 mil/year). Could be worse

19. 16-18 students and funding StudentsInstits 16,1718 FTPTH/Needs TotalAverage Colleges332519116105187552,274 Schools2,09941119233457218 Other834339351693111 Total3,265964141164371,306400 Colleges are larger but future cuts could fall disproportionately on 18 year olds, part-timers & on additional funding factors £ millionsProg DisadvH/NBursary Total Colleges3,3724201101333,616 Schools2,05711020422,121 Other2914814519452 Total5,7215772751946,193

20. The BIS budget after 2015 £ bil HE & Science 7.9 19+ FE 2.9 All other BIS 2.4 BIS RDEL 13.2 BIS revenue spending in 2015-16 and total outlays on HE IFS scenarios for UUK 1. Reduce science/research (£4.6 bil) 2. Cut Medicine & STEM (higher fees) 3. End HE maintenance grants (£2 bil) 4. Reduce number of FT HE students 5. Cut 19+ FE/Skills (on top of 35% cuts 2009-15)

21. Several options for 19+ FE/ Skills Several options for reform 1.Devolution of budgets to 152 councils, 39 LEPs or 7 metro areas 2.Employer-routed funding for apprenticeships (£700 mil 19+ spend) 3.Expansion of FE loans to 19 year olds & Level 2 4.Action to reduce numbers under 24 on benefit The bigger the reform, the less things change in the short-term!

22. College income Colleges SFA FE College income 2014-15 (£ millions) 233 Colleges EFA 2,823 (44%) SFA 1,734 (28%) Other 1,756 (28%) Total 6,396 Surplus 34 Sixth form colleges 2014-15 (£ millions) 93 Colleges EFA 822 (95%) SFA 42 (5%) Total 864 Surplus 20 EFA

23. Recent trend in income Income 2009-1020102011201220132014 2014-15 SFC 16-18£726m+5.1%+0.8%-2.7% -2.2%£712 m FE 16-18£3,005m+0.6%-0.8%-1.7%-2.2% £2,823m FE SFA£2,169 m-3.7%+4.1%-2.1%-9.3%-6.2%£1,810m £5,900m£5,345m Spending changes & budget reductions affect colleges incrementally c10% (£550 mil) cash reductions in last 5 years Risk that the pace of budget reductions continues & even increase Changes depend on policy but also on the college response

24. Financial health College finances Deficits in 2012-13 (48% operating deficits, 10% cash based deficit Ofsted-related spending + capital projects = short-term deterioration Financial outturn for 2013-14 expected to be worse Rising costs (staff costs 60-65%) & falling income How Colleges need to respond Understanding their own position & likely scenarios Governing bodies responsible for solvency & viability of college Use AoC’s ETF-funded governance support programme Core financial skills Relationships with SFA, EFA, MPs, councils & banks Think about opportunities and what comes next

25. The wider context Education and training for those over 19 Changes to public spending permanent Consider HE, FE & Adult education together Loans are a way to make fees more palatable Fees were a bigger part of the mix in the 1980s.. but we’re now in an Aldi / Amazon world with big income gaps Adults are working longer/need to retrain Employers still think about workforce development Education and training for 16 to 18 year olds Young people still seeking a route to university & work Survival strategies at a time of population & budget reductions Considerable curriculum change 2015 to 2018

26. On a more positive note... Some final thoughts Colleges have friends and allies Government will still be spending £70+ billion on education in 2020 Income generation opportunities exist Quality counts Productivity improvements from IT only partly realised in education There are some relatively simple things that can still be done Important to plan now Slides available at http://www.aoc.co.uk/funding-and-corporate-services/ funding-and-finance/reports-and-presentations