Understanding college finances - an AoC explainer (22 Sept 2020)

22 Sep 2020

There are 240 further education college corporations in England, educating and training 2.2 million people each year. Colleges shut down most of their buildings in March 2020, maintaining in-person courses for vulnerable students and shifting to remote learning for the rest. Ministers made quick decisions on college funding which helped most colleges:

  • DfE continued to pay grants to colleges to support education of 16-to-18 -year-olds and adults with rule changes to remove clawback in most cases if adult education targets are not achieved.
  • Rules were adjusted to allow furloughed apprentices to stay in education.
  • Colleges were given more flexibility to deploy existing funds to support students on free meals and to apply for extra money if neede

Colleges incurred extra IT costs in summer 2020 which were not directly funded but they made savings in other areas of their budget which allowed most to cover costs. Private income – from adult learners for summer term courses, from international students, from companies for conference hire and training – largely disappeared, leaving some colleges with considerable shortfalls. In summer 2020, AoC forecast a £150 million negative financial impact on the sector in the 2019-20 financial year. We now believe the combined impact will be around £100 million - just over 1% of annual college income. The National Audit Office recently reported that colleges collectively made a deficit of £80 million in 2018-9 but that the sector has been rebuilding its finances. NAO also commented that this financial improvement has come at a cost of colleges reducing course breadth, holding down staff pay and reducing building maintenance.

Colleges have now restarted for the 2020-1 academic year and it is too early to say what the financial picture will be. College have security on their 16-to-18 funding and have the benefits of the 7% increase (£400 million) in that budget (from the September 2019 spending round) but face three big challenges:

  • Uncertain income: Colleges need to sustain enrolments and retention to secure adult education, apprenticeship, higher education and commercial income – which together account for £2 billion of income that is at risk if they do not.
  • Higher costs associated with the full return: Social distancing has made education less efficient because it requires more space, smaller class sizes and fewer people on transport to college. Colleges are providing more IT and more cleaning and have new costs associated with Covid marshals, cover for absence
  • Cashflow: DfE underpays colleges each year in March by 6% on grant income. The bureaucracy associated with apprenticeships means that payment from government often comes three months after activity. In a recent AoC survey, a quarter of colleges predicted that they will have fewer than 10 cash days in March 2021

Colleges were asked to assess the Covid impact on their 2020-1 budgets in July 2020. At that stage they anticipated a £300 million hit. The Chancellor’s summer economic update made new funds available for colleges for catch-up tuition, for 18 and 19 year olds, for building condition improvement and for employer incentives to take on apprentices but these funds require accompanying spending or may need to be returned in 2021.

Colleges are self-governing and have to spend money up front without certainty in all cases that income will be forthcoming and have few places to turn for cashflow support. In its recent report, the National Audit Office explain both how government has reduced further education funding while increasing intervention in individual colleges which are financially weak. Before the pandemic started, DfE had almost half of colleges in either full or early intervention (which means extra oversight from officials but not any extra money). Recent events have had a severe impact on commercially focused colleges. Around 40 colleges have asked for support from DfE and these numbers will rise but, as yet, there has been no change to the very intervention regime.  DfE issues a financial notice to improve to colleges who receive support so there is a risk that there will be a lot more notices in 2021.

College governing bodies are required to keep costs within income. An AoC survey in July 2020 forecast a 50% reduction in new starts, including in areas with long-term growth potential like construction and engineering. There is a clear danger that the fall in the number of new apprentices will force colleges to cut staff and capacity.

AoC is preparing a paper for the spending review which HM Treasury plans for November 2020 which has some suggestions for immediate actions over the next 3-12 months and some longer term reforms which should inform the FE white paper and departmental budgets.

Association of Colleges, 22 September 2020

For queries on this note contact: julian.gravatt@aoc.co.uk