Funding and finance

College finances

There are 230 colleges. Their most recent financial results were the best yet[1] but:

• the financial outlook is genuinely grim and will result in more colleges in intervention by early 2024.

• a “business as usual” approach will not work. A lot has changed in the last 12 months. DfE and ESFA need to look at the full picture of oversight and funding rules and consider changes.

• Costs: Inflation (CPI) is 9%, forecast to rise to 11%, expected to fall back to 5%[2] by summer 2023 but is completely unpredictable. The fact that colleges spend an average of 66% of their income on pay means that inflation is mainly a indirect issue (dependent on pay rise decisions) but many colleges report massive increases in energy bills on renewal. Many have 12 month contracts running until October 2022. Energy cost 2% of income on average before the pandemic but is now expected to absorb as much as 4-5%[3]

• Staffing: College staff turnover is at a record high with recruitment a major problem across most roles. AoC’s report shared with DfE in February 2022 (ie before the latest inflation increases) described retention and recruitment as the worst in forty years[4]. AoC’s recommended 2.5% pay increase plus flat-rate cost of living increases for 2022-3[5] is more than many colleges can afford yet far short of the joint union pay claim and there are currently 30 UCU pay ballots.

• Upward pressures on staff costs: Colleges compete for staff with other employers, many of whom can afford bigger cost of living increases and some of whom have DFE support to do this. DfE’s evidence to the School Teacher Pay review body in March 2022 suggested a 3% teacher pay rise[6] and there are press reports that the final decision may be higher. Colleges are also contending with increased employer’s national insurance (increasing costs by 0.4% of income) and continuing increases in the national minimum wage[7]

• Recruitment: Colleges operate in highly competitive markets and, while many colleges are attractive (with many having better Ofsted grades than ever), FE college 16-18 recruitment is down 1% on average in 2021-2, adult education enrolments have fallen a few percentage points short of 97% and higher education remains challenging. A few colleges have increased apprenticeship numbers[8] but most have not. Colleges are making a major DfE-supported bet on T-levels in autumn 2022[9] but sixth form competition, student poverty and economic uncertainty all mean that recruitment plans could be waylaid for a second year.

• Funding rates: DfE and Treasury agreed the 2021 spending review (which determines 2022-3 budgets) in a month when CPI was less than 4% on the assumption that necessary 16-18 costs are rising by 2% a year and all other costs can be fixed in cash terms.

• Policy clawback risk: Almost all of the extra funding allocated to colleges in 2022-3 is conditional on performance. The £242 million increase in 16-18 allocations is all accounted for by the additional 40 hours teaching and the growth of T levels while the capital grants allocated via FECTF, 16-18 expansion and the T level programme. There is major concern over the 40 hour policy because, while officials say there will be no clawback in 2022-3, the guidance and the reporting against 2020-1 baselines (even for colleges whose full-time students already study for more than 580 hours)[10] suggested otherwise. Meanwhile DFE has increased T-level reconciliation thresholds[11] and ESFA and MCAs are being increasingly rigid on adult education tolerance[12].

• Capital grants and projects: DfE is funding the start of many college capital projects in 2022-3 as part of the FE capital programme which has £2.8 billion over 3 years. Progress is slow on the main FECTF programme because DfE’s grant offers made in spring 2022 to 78 colleges[13] do not recognise the actual and predicted costs of projects planned a year earlier and 100% responsibility for cost increases rests with colleges. Lower capital spending since 2015 has been a contributory factor to the recent improvement in college financial health[14] so the increase in spending as well as some new borrowing is an obvious risk indicator.

Consequences for colleges, their staff, students and communities

There are several consequences of these issues for colleges, their staff and students:

• College decision-making: Governing bodies are signing off 2022-3 budgets in a fog of uncertainty about the short and medium term. Colleges have a high proportion of unavoidable costs and, although DfE 16-18 funding grants provide certainty for 12 months, income is increasingly variable and subject to events. Larger capital projects involve new and unpredictable challenges. If several college leadership teams makes the wrong assumptions or bets now, there is a higher probability that a few will run into cashflow and other difficulties towards the end of 2023 and start of 2024 when clawbacks and redundancy costs start to crystallise, capital projects will be in mid-stream and DfE payments are at their slowest[15].

• Pay, redundancy and capacity: Some colleges will decide, either because of pressure from staff or as a competitive decision, to increase overall pay levels but with saving coming from redundancies. Staff turnover is already higher than ever in many colleges and some will report better than anticipated 2021-2 results because they are holding vacancies but there are possible consequences if individual college downsizing results in an overall reduction in the FE teaching workforce at a time when government wants colleges to do more.

• Student recruitment and retention: There were several unpredictable changes in the labour market in the last couple of years and, while unemployment is low, it could increase in the next 12 months with possible knock-on consequences for T-level placements and apprenticeships. Economic change may have other consequences for student recruitment and retention. Colleges reported lower 17 and 18 year old student numbers in autumn 2021 and there is some evidence that this was a result of students choosing work over education.

• Oversight and funding of colleges: Increased DfE commitment to supporting colleges and tackling skills issues means there are more officials now involved in the oversight and funding of colleges but there are dispersed across several teams in the DfE Skills division, ESFA funding and PMO teams and FE commissioner team. There is more FE information and intelligence than ever in the DfE group but a risk that individual units continue to push for full implementation of pre-existing policies without a full corporate understanding of the impact on the 230 colleges who will deliver many of these

Action required from the Department for Education

AoC’s chief executive, David Hughes, wrote to the former Education secretary, Nadhin Zahawi, with several proposals for addressing staffing issues in colleges by stabilising the financial environment for them. The biggest single difference to the financial outlook would be a Treasury update of the 2021 spending review to take account of the fact that FE inflation was never 2% and is now nearly 10% but there are other measures that would help inside the current restricted spending envelope including:

• ESFA and combined authority business case processes to allow more leeway for 2021-2 and 2022-3 AEB and 2022-3 T level shortfalls because colleges risk clawback on both;

• more flexibility on the extra 40 funded hours in 2022-3 which are eating into the funding available, and which are also more challenging to deliver given the widespread difficulties in recruiting and retaining teaching staff;

• suspending intervention action on ESFA financial health assessments and clarifying the nature of the FE commissioner 65% staff cost benchmark because those measures will severely constrain colleges from making better pay offers to staff;

• a cost increase sharing mechanism for approved DFE capital projects (currently 100% of extra costs fall to the college) because of the large inflationary increases in construction materials and labour costs;

• offering an income guarantee for colleges where the grade inflation in last summer’s exams led to more young people staying in school sixth forms. This impacts through the lagged system on income from the autumn, just when we expect those student numbers to bounce back. The lagged system was not designed for such unique circumstances and needs to be amended for next academic year;

• considering a rate increase on AEB, learning from the approach taken in London by the GLA with it’s devolved powers. The AEB funding rates have not increased for over a decade;

• considering a rate premium on priority courses and qualifications, including in skills shortage areas such as construction, engineering, digital and health where colleges have the most difficulties in recruiting skilled staff and for T Levels, HTQs and other courses which the Government wishes to see grow.

Julian Gravatt
Deputy Chief Executive
Association of Colleges
15 July 2022

[1] 83% of colleges had good or outstanding financial health on ESFA assessment of their 2020-1 financial results (year ending 31 July 2021). There are fewer than 3% of colleges in intervention

[2] Bank of England core CPI projection in its May 2022 monetary policy report is for CPI to be 5% in July 2023

[3] Colleges energy costs vary widely because of different building types and contracts and most made energy savings in 2020. Most have fixed price contracts (12 or 24 months) but have faced doubling or worse on renewal

[4] AoC report College staffing challenges in 2022 identified 7,000 vacancies in colleges with particular problems in technical teaching areas but also learning support, student services and estates

[5] AoC full 2022-3 pay recommendation is for a 2.5% consolidated pay increase, a £500 non consolidated increase up to a locally determined threshold and a £750 non consolidated increase for lowest paid staff. Details on AoC website 21 June 2022

[6][6] DfE evidence to School teacher pay review body suggested a 3% increase for all teachers and higher percentages for certain staff (for example new recruits). DfE’s technical note on school costs estimated that an average funding increase of 9.8% over 2 years (2022-3 and 2023-4) will be sufficient to cover pay rises given a 3% increase in costs. As explained in this note, there is no equivalent headroom for colleges

[7] The Chancellor increased the national minimum wage rose by 6.6% (to £9,50) in April 2022 and the Low Pay Commission is consulting on an increase of between 6.7% and 10.5% (probably 8.6% to £10.32) for April 2023. An estimated 1 in 10 college staff are on the minimum wage and another 1 in 10 are paid rates between the current rate (£9.50) and £10.50

[8] In a couple of FE colleges, apprenticeships are now so large that 16-18 education is barely 20% of total income

[9] FE colleges enrolled 4,500 T-level students and have about 20,000 funded places in 2022-3 (4% of total funded 16-18 numbers in colleges

[10] DfE reiterated the requirement for colleges to increase teaching hours for all 16-18 students by 40 hours on 1 July 2022. Many colleges already run full-time courses for more than 540 hours because this is what is needed to complete the course and is what students need.

[11] DfE has reduced T-level recruitment tolerance from 40% this year to 20% in 2022-3

[12] The £60 million in adult education budget clawed back in the 2020-1 year exceeded the value of all the Covid cash support paid out to colleges in that year and the year before via the Job retention scheme, provider relief scheme, CBILS loans etc

[13] FECTF funding promised to 16 directly DfE managed college projects and 62 colleges who submitted stage 1 bids in March 2021 and stage 2 bids in October 2021

[14] DfE capital spending on FE reached a 20 year low in the 2021-2 financial year at just £138 million. The college sector has cut its external debt from £1.9 billion in 2015 to £1 billion. £450 million in DfE restructuring grants and loans helped reduce debt and colleges still owed £100 million to DfE as at 31 July 2021 but the biggest factor in debt reduction has been lower capital spending

[15] DfE underpays 16-18 and adult education grant by 6% of income each March. Slow payment of capital grants (generally dependent on proof of spending) is a cashflow risk for colleges with sizeable projects