The 2019-20 budget round for colleges - harder than ever (15 April 2019)

15 Apr 2019

For most colleges, the 2019-20 budget round will be the hardest in years. Here are the reasons why:

  • demography and falling 16-18 numbers in education: The number of 16-to-18-year-olds in England reachs a low point this year and this contributes to falling numbers both in education and in colleges. Total 16-to-18 student numbers in FE colleges are forecast to be 2% less in 2018-9 than in 2017-8 with the numbers in sixth form colleges marginally higher at 0.6%. The funding formula is run by the Education and Skills Funding Agency (ESFA - an agency of DfE). ESFA adjusts next year's budget on the basis of this year's forecast numbers (described as a "lagged number" approach). The majority of colleges will therefore receive a smaller cash sum for 16-to-18 education in 2019-20.
  • fixed funding rates:  DfE has fixed funding rates in cash terms again. This is the 7th year in which government has not accouned for inflation when setting 16-18, adult education and apprenticeship rates. The official economic forecast predicts a 2% rise in the Consumer Price Index (CPI) and a 3% rise in average earnings in the next 12 months (see Page 9 of the Office of Budget Responsibility's March 2019 Economic and Fiscal Outlook).
  • rising staff costs: Colleges spend two-thirds of their income on staff and face understandable pressure to increase pay levels to motivate staff and to keep up with jobs in comparable sectors. DfE provided a teacher pay grant to schools in 2018 to support a two-year pay deal but nothing comparable for colleges. Colleges report staff turnover averaging 17% and face particular challenges recruiting and retaining maths, science and engineering teachers (for more information, see AoC's College Workforce survey)
  • apprenticeship spending controls: Apprenticeship income accounts for around 10% of FE college. Although larger employers have not used their spending power in the first two years of the apprenticeship levy, this is starting to change and activity is increasing. HM Treasury uses levy income to fund all apprenticeship training activity, including the apprentices in smaller non-levy paying employers plus the costs of incentives and top-ups. After two years in which DfE underspent the budget (2017-8 and 2018-9 financial year), NAO reports that the 2019-20 budget is fully committed and that there will be an overspend the 2020-21 budget if no remedial action is taken (see Pages 16-18 of NAO's Apprenticeship Programme report). ESFA has issued 2019-20 allocations to colleges for the training of non-levy apprentices. These allocations are slightly less than 2018-9 activity and will require many colleges to ration places. In some cases, colleges will be required to turn employers and 16-to-18 years olds away.
  • constraints on the adult education budget: DfE's adult education budget is also fully committed in 2019-20. Half of the budget is now allocated to 7 Mayoral Combined Authorities (MCAs) and the Greater London Authority (GLA) (for more information, see AoC's Skills Devolution pages). The total budget has been fixed at £1.5 billion since 2015 despite inflation, a rising population and growing skills shortages. ESFA's national budget is fully committed in 2019-20. Some colleges have had 2019-20 allocations which are less than their 2018-9 activity. Meanwhile other colleges with activity in devolved area are facing reductions because the authorities have new priorities.
  • competitors able to run provision on income that covers marginal costs only: Colleges compete with schools for 16-to-18 year olds and with universities for higher education students. Secondary schools receive higher levels of funding for pre-16 pupils and are able to use this money to subsidise sixth form provision. Some universities, meanwhile, are increasing their higher technical and degree apprenticeship activity. Universities, like schools and colleges, face big financial pressures but many can support new developments from existing reserves.
  • higher pension costs: All colleges will pay higher contributions to the teacher pension scheme from September 2019 and many will face higher contributions to the Local Government Scheme from April 2020. DfE has promised to provide funding for one year to cover the extra TPS costs. There will not be any funding for higher LGPS costs and there will not be any information on changes to contributions until autumn 2019.
  • new costs, obligations and unfunded mandates: Colleges will take on new technology costs in 2019-20 as a result of reductions in DfE funding to JISC (which provides network and other services to the sector). Colleges with higher education provision will pay subscription fees from April 2019 for the Office for Students. Colleges continue to be expected to provide a wide variety of services - from careers advice to support for mental health - with development funding only. ESFA's funding agreement with colleges runs to 50 pages and includes numerous obligations on colleges; the equivalent document from 1999 was ten pages long (ie 20% as long)
  • a tougher intervention regime: Colleges in England now operate in a system in which DfE or their creditors can invoke insolvency procedures in certain cases and in which there is a very limited safety net if cash runs out. Banks used to be prepared to offer overdrafts to colleges but have been reducing their lending to the sector since 2015. DfE's published a new College Oversight and Intervention policy in April 2019 which will declare more colleges as having finances that "require improvement" and that will involve remedial action against these institutions and those whose finances are judged inadequate. The impact when it comes to 2019-20 budget setting will be to induce more caution in terms of assumptions and a stronger incentive to avoid deficits while conserving cashflow.

Colleges have most of the information they need to set 2019-20 budgets but face considerable uncertainty about 2020 and beyond. HM Treasury will not complete its next spending review until autumn 2019 and, until it does, there will be no firm information on government funding levels or rates which accounts for the majority of college income.

The vast majority of Colleges are well managed when it comes to financial decision-making. The sector has overcome financial challenges in the past. There has been a lot of activity in the last 24 months. More than 50 colleges have developed financial recovery plans in the last couple of years in liaison with the FE commissioner; there have been 62 college-to-college mergers and ESFA has allocated more than £300 million in loans to support college restructuring following area reviews. These loans have been signed off individually by the Treasury and have allowed colleges to protect courses and provision for students where the commercial banks are unwilling to lend. Nevertheless the issues listed above create a serious set of issues for many colleges and leave them with few easy options.

AoC's support for the sector includes its forthcoming annual finance conference, its support for the LoveOurColleges campaign and the work we are doing on a 2019 spending review submission. Any queries on this note, please ask Julian Gravatt, Deputy Chief Executive (Policy, Curriculum and Funding)