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College 2020-1 budgets, what we know

12 November 2019

Six months ago, I wrote a note explaining why the 2019-20 budget round for colleges would be the hardest for years. A lot has happened since then and there's a general election soon but we already have some information for 2020-1 budget round. Here's what we know: We know quite a lot about the budget outlook for colleges across 12 areas - assuming there is no change as a result of the election: 16-to-18 funding: At the start of September, the Chancellor of the Exchequer and Education Secretary announced a £400 million spending increase for 16-to-18 education. This was widely welcomed by colleges because it represents the first significant increase in this budget for years but, in the bigger scheme of things, it's quite modest. The 7% increase in cash in 2020 comes after 7 years in which DfE refused to fund inflation in this budget. Government has chosen to target the money quite carefully so the actual increase will depend on their mix of courses at the college. Unless new ministers change their mind, colleges will get an outline (an "allocation calculation toolkit") in January 2020 and their final allocations in March 2020. Just before the election was called, DfE provided an update on the sub-division of the £400 million. As well as increasing funding rates by 4.7%, DFE will increase programme weightings for high cost courses in six sector subject areas, introduce a new £400 high value course premium (mainly for A-level students) and pay a supplement or up to £750 for Level 3 students taking GCSE English and maths courses. I estimate that the combined benefit of these changes for the 196 FE college corporations will be an additional £195 million (£110 million from the rate increase, £50 million from programme weightings, £10 million from high value courses, £25 million from resits). If so, this would represent an average 8% increase in funding rates, offset for some by falling student numbers. I estimate the 52 sixth form colleges will secure a similar average increase (8%) but made up of different components (more on high value courses). The 16-18 formula is now so complicated that any predictions should be taken with great deal of care. The rest of the funds will be spent on the 2,000 schools with sixth forms and 16-19 academies. demography and demand for 16-18 education: The number of 16-to-18-year-olds in England reachs a low point in 2019-20 and this has contributed to falling numbers both in education and in colleges. Total 16-to-18 student numbers in FE colleges were 2% less in 2018-9 than in 2017-8 with the numbers in sixth form colleges marginally higher at 0.6%. The funding formula adjusts one year's budget on the basis of the previous year's forecast numbers (described as a "lagged number" approach) so the majority of colleges received a smaller cash sum for 16-to-18 education in 2019-20. What happens in 2020-1 depends on this term's enrolments. Some colleges are reporting higher nunmbers but others are not. The official stocktake will be in the Individual Learner Record returned on 5 December 2019. Individual college enrolments will feed through to 2020-1 allocations. 16-18 apprenticeship shortages: Some of the gains made by FE colleges in recruiting young students come at the expense of their own apprenticeship recruitment. The 2017 apprenticeship reforms (the levy, the off-the-job training minimum, new funding rates) contributed to a fall in apprenticeship numbers. Colleges are now finding that they cannot increase the numbers of 16-18 apprentices they train in small companies because their funding allocations are fixed. In some cases the young people who might, in the past, have been starting an apprenticeship this autumn are, instead, signing up for a study programme. fixed funding rates - or worse - for adult education and apprenticeships: There was nothing in the September spending announcements about adult education or apprenticeships . This suggests there wasn't any good news to tell. Treasury and DfE prioritised schools, high needs and 16-18 and, back in October, officials described the plan for the rest as being "flat cash". For about the 10th year in row, adult FE rates are likely to be fixed in cash terms, implying a real-term cuts. 47% of the adult education budget is devolved to Mayoral Combined Authorities and the Greater London Authority. They are unlikely to vary from national assumptions in the second year of devolution. Meanwhile the Institute for Apprenticeships and Technical Education is continuing its reviews which will reduce the rates for some standards. The opposition parties have both promised billions of pounds of extra spending on adult education but, even if they win, extra funds are unlikely to become available until 2021. high needs: Recent reports from the Education Select Committee and National Audit Office confirmed the disastrous state of special education need funding in England so it is no surprise that the biggest increase in the September spending announcement was the 12% average rise in the high needs block. Some of the extra money may alleviate pressure in colleges but the priority of most local authorities will be to alleviate pressure in schools and to remove their school-to-high needs cross subsidy. higher education: The Independent Panel for the government's Post-18 review made an empatic set of recommendations in May 2019 for the expansion of higher technical education and for funding to support these courses in colleges. The government has not yet responded to the panel and any change will not take effect until 2021-2 at the earliest (whoever is in power). In the meantime, colleges faced a great deal of competition for higher education students for a slightly declining number of young adults (because of demography). Recruitment for 2020-1 has started before final confirmation of tuition fee caps. If the Conservatives return to power, the full-time cap will almost certainty stay at £9,250. If Labour win an overall majority, tuition fees may well be abolished entirely and as early as 2020-1 but this depends on the exact wording in their manifesto. nationally agreed and locally decided pay rises: AoC negotiates a national pay recommendation with education trade unions for FE colleges via a National Joint Forum though it is up to individual colleges to set pay and conditions, taking these recommendations into account. AoC's offer of a 1% pay rise or a £250 increase (whichever is the largest) for 2019-20 on Monday 11 November and was not accepted by the union side and University and College Union officials say that they will start ballots for industrial action. The Sixth Form College Association carries out parallel negotiations for sixth form colleges and made a 1.5% pay offer in October 2019 (backdated to September). Negotiations continue. the higher national minimum wage: The national minimum wage for those over 25 has risen by 22% in the last four years (2015-6 to 2019-20) as a result of government policy to improve the pay of the lowest paid. The Low Pay Commission consulted in summer 2019 on a £8.67/hour rate for April 2020 and afterwards which would be a 5.7% increase. Most staff employed by colleges earn about minimum wage levels but, as elsewhere in education, substantial numbers of people working as catering assistants, cleaners and security staff are paid at these levels. The Conservative Chancellor has promised a £10.50 adult minimum wage by 2024. Labour are likely to match or surpass this. higher support staff pension contributions after April 2020: Around 80,000 people working in colleges are enrolled in the Local Government Pension Scheme (LGPS) which is organised into more than 80 funds and which offers defined benefits (based on final salary for pre-2014 service and average pay since then). Average employer contributions for colleges have doubled in the last twenty years and now account for £420 million across the sector - more than 6% of total income. Colleges have very little control of these costs and are required by law to offer LGPS membership to those members of staff who are not eligible for Teacher Pension Scheme (TPS) membership. LGPS valuations take place every three years and are underway now. It is too early to say what the results will be but there are already signs that the good news (a rise in funding levels, which averaged 85% three years ago) will not result in lower contributions but, on the contrary, these will rise because the actuaries forecast rising costs in future. Some colleges report that they face increases of several percentage points in their contributions. This would represent an additional six figure cost for the average college. capital costs and some maintenance spending: Colleges are wholly responsible for their own buildings and have been forced to cut back on capital and maintenance spending to conserve their cash. Government capital funding for colleges has also been cut back and is routed to the sector via a number of difficult-to-navigate routes (Local Enterprise Partnership skills capital funds, T-Level early adopter funds, institutes of Technology). Lack of government capital funding and a desire to make bigger profits elsewhere has resulted in the two main clearing banks refusing new loans and seeking to renegotiate existing ones. Interest rates in the wider UK economy have fallen in recent years but college loan repayments haven't fallen. For the average FE college, debt service costs account for 5% of income in FE colleges and 2% in sixth form colleges. The Conservative party has made a specific pledge for a £1.8 billion 5 year college building programme but projects take time and grants would not start until 2021. In the meantime, some colleges need to tackle urgent maintenance issues. About one-third of the college estate is is poor or bad (grade C or D) on their own assessment and in need of maintenance. exam fees: £1 in every £40 spent by colleges goes on exam fees (2.5% of income on average). Colleges spend a larger share of their budgets on external exam costs than schools because of the larger role that external assessment has in post-16 education and training. Awarding bodies have similar cost structures to other education organisations (lots of spending on professional staff) but they also incur development costs resulting from constant qualification change and, in some cases, make significant returns for their owners in markets that are not particularly competitive. It is no surprise, therefore, that Ofqual's newly published qualification price index reports overall price increases of 4.5% in 2019, with vocational & technical qualifications increasing on average by 3.3% and general qualifications rising by 5.6%. Colleges will need to find the money for these increases from cash-limited budgets. new costs and obligations: Colleges took on new technology costs in 2019-20 as a result of reductions in DfE funding to JISC and are likely to find cybersecurity a growing pressure on their budgets. 168 colleges are also paying Office for Student fees and Quality Assurance Agency subscriptions at an inflated rate because of an unjustified DfE decision to include ESFA-regulated students in the calculation. For the average colleges this is a five figure bill (with the OfS fees averaging £70 a student: seven times the amount universities pay).Colleges continue to be expected to provide a wide variety of services - from careers advice to support for mental health - from core budgets. AoC successfully persuaded ESFA to drop four new requirements from its 2019-20 funding agreement but the sector still faces obligations set out in a document running to 110 pages. The election will change many things but it will take time While the election is underway, politicians make promises and the official government machine stays silent. If there is a clear result on 12th/13th December 2019, then a new government will be appointed quickly (perhaps with the same ministers if the Conservatives win). If there is no clear result, things will take longer. In either circumstance, it is likely to take a few weeks before the first spending announcement and a couple of months (because of Treasury timelines) for the first budget. There may well be some high profile changes to the government's 2020-1 spending plans - and possibly some short notice cuts - but the majority of changes will be focused on the period after April 2021 (the government's 2021-2 financial year). The current Chancellor fixed departmental spending budgets for the 2020-1 year in September 2019. None of the parties contesting the 2019 election have published their manifestos yet but two parties - Labour and the Lib Dems - have both already promised higher spending on adult education. We are some way off knowing whether they'll be able to implement these plans or how but given that both sets of proposal involve reform alongside the additional funds, it is reasonable to assume that any benefit for colleges will arise after 2021, leaving institutions with the issues set out above. Where to find out more This note represents my judgement as at 13 November 2019. Many people associated with colleges will be convening in Birmingham next week for AoC's Annual Conference. I'll be running a session on college funding in the 2020s on Wednesday 20 November 2019. AoC's Funding conference on 15 January 2020 is a not-to-be-missed event for college finance professionals and will be a good chance to asssess things early in the New Year. Julian GravattDeputy Chief Executive, AoC