AoSECPrincipals’ Event

Tuesday 7th July 2015

Martin Doel: AoC Chief ExecutiveRichard Atkins: AoC President 2014/15 & Principal, Exeter College

Outlook for Colleges 2015-2020

• The Government: a) the mandate

b) the personalities

c) the policies

• Colleges: a) funding and finance

b) options for the new government

c) how will college finances improve?

• Working with Government

The Government

Personalities

Nicky Morgan Nick BolesSajid Javid

The Government

Personalities

Jo Johnson Matthew Hancock

Greg Clark

The Government

• Mandate

• Personalities

• Policies

The Government

• Personalities

• Policies

• Apprenticeships• Young unemployed• Devolution• Trade Unions • Schools• Money

The Government

• Personalities

• Policies

• Apprenticeships and Skills• 3m apprenticeships

Source: LSect

The Government

• Personalities

• Policies

• Apprenticeships and Skills• 3m apprenticeships• Remove ‘low value classroom based’ courses• Degree apprenticeships• National colleges

The Government

• Personalities

• Policies

• Apprenticeships• Devolution

• Northern Powerhouse• Elected mayors• Area reviews?

The Government

• Personalities

• Policies

• Apprenticeships• Devolution • Young unemployed

• Cap benefits• Earn or learn• Apprenticeship, training or citizen

service

The Government

• Personalities

• Policies

• Apprenticeships• Devolution • Young unemployed• Trades Unions

• 50% turnout required• 40% threshold of those entitled to vote• Mandate time limited

The Government

• Personalities

• Policies

• Apprenticeships• Devolution • Young unemployed• Trades Unions• Schools

• Coasting schools/Regional Schools Commissioners

• JCP Advisor in schools• Protect 5-16• 500 new free schools and a UTC ‘in reach of

every town’

The Government

• Personalities

• Policies

• Apprenticeships• Devolution • Young unemployed• Trades Unions• Schools• Money

• Balanced budget by 2018• 20% cut for unprotected budgets

Political Timetable

Summer 2015General election (7 May 2015)Formation of new government (8 May 2015)Parliament returns (18 May 2015)Queens speech (27 May 2015)Budget (8 July 2015)First legislation (eg Education, Welfare, Tax, EU Referendum bills)

Autumn 2015Ministerial decisions on big issuesChanges in agencies? Ofsted? FE commissioner? SFA? HEFCE?Spending review (by November 2015)HE recruitment with no student number controlsCollege responses to the new climate/new funding

The bigger spending picture

Government finances:Deficit to be closed this decade;- via tax income - plus spending cutsOffsetting extra spending on;- pensions, debt interest (AME)- NHS (protected DEL)

Conservative plans:Budget surplus by 2018No increase in headline tax rates£30 bil in fiscal consolidation£5 bil tax measures£12 bil benefits & tax credits£13 bil departmental cuts

2009-10

2010-1

2011-2

2012-3

2013-4

2014-5

2015-6

2016-7

2017-8

2018-9

-100

0

100

200

300

400

500

600

700

800

Taxes

PSCE

RAME

RDEL

Deficit

Public finances (in £ billions, constant cash)

The Emergency Budget

• The 2015 budget (8th July)• Budget will update tax & spending forecasts• Legislation to implement tax promises• Start of 2015 spending review• Greater clarity on departmental spending plans

Departmental spending £ bil 2016 to 2018

Protected (NHS, Schools, DFID) 160 +5?

Fairly difficult to cut (Defence, rUK) 70 0

Post 16, Police, Local Govt, the rest 86 -18 (20%)

College Income

Colleges

SFA

FE College income2014-15 (£ millions)233 Colleges

EFA 2,823 (44%)SFA 1,734 (28%)Other 1,756 (28%)Total 6,396Surplus 34

Sixth form colleges2014-15 (£ millions)93 Colleges

EFA 822 (95%)Other 42 (5%)Total 864 Surplus 20

EFA

Funding of English Colleges

Six areas:

• 16 to 18 education

• Adult skills budget

• Apprenticeships

• Devolution of budgets

• Further education loans

• Higher education

(1) 16-18 education – DFE Budget

• DfE funds 4.3 mil primary and 2.7 mil secondary pupils via EFA and LA. Money based on pupil numbers & characteristics

• EFA funds 1.3 mil 16-18 year olds via a national formula. £4,000 for a full-time student; less for a part-timer; more for some courses (10%); extra for two types of disadvantage (English/Maths + postcode); a deduction for withdrawals; extra for large programmes

£ bil

Schools budget 41.2

16-18 7.0

All other DFE 5.5

DFE RDEL 53.7

(1) 16-18 education – students and funding

Students Instit 16,17

18 FT PT H/Needs

Total Average

Colleges 332 519 116 105 18 755 2,274

Schools 2,099 411 19 23 3 457 218

Special Schools 552 3 - - 14 17 30

Comm & Charit 282 31 9 36 2 77 273

Total 3,265 964 141 164 37 1,306 400

£ millions Prog Of whichDisadv

H/N BursaryFree Meals

Total

Colleges 3,372 420 110 135 3,616

Schools 2,057 110 20 43 2,121

Special Schools 13 1 137 2 152

Comm & Charit 291 48 145 16 305

Total 5,721 577 275 196 6,193

(1) 16-18 Education – Developments;In 2015-16Funding driven by student data (this year’s recruitment)FE college recruitment down c3% 14/15Funding down in 2015/16English and Maths funding condition a significant challenge

In 2016-17 and beyondBig question - will 16-18 be protected at allForecast that 16-18 population will fall by 8% from 2015 to 2020Savings simply by maintaining not raising participation %EFA will make some small technical savings in 2016-17Further cuts either to rates or factors?Adjustments to lagged number system? Local commissioning?It takes time to adjust any formula involving schools

(2) SFA funding – BIS budget;

£ bil

HE & Science 7.9

19+ FE 2.9

All other BIS 2.4

BIS RDEL 13.2

• BIS funds 1m undergraduates via HE student loan scheme (£40,000+ in student debt with a forecast 45% write-off) Student loan outlays £14 billion a year and rising

• SFA funds 2m adults over 19 and 800,000 apprentices (aged 16 upwards) via a several different national formulae

(2) SFA funding – where does it go?

£ millions Total

19+ Apprenticeships 755

16-18 Apprenticeships 732

Apprenticeship grants for employers

131

Apprenticeships 1,487

£ millions Total19+ further education 1,328

ESF funding via SFA 250

Community learning 210

Offender learning 128

19+ financial support 127

Employer ownership (est) 70

ESOL mandation 50

Other SFA, 2014-15 A/Year 2,374

Colleges in 2014-15 Total %

19+ FE 971 73

19+ Apps 284 38

16-18 Apps 277 36

(2) SFA funding developments;

In 2015-16SFA funding letter out very lateOverall spending (including capital and loans) cut by 5%Apprenticeship funding protected“Other ASB” (adult further education ) cut 24% in 2015-16Plan to simplify the rules slightly in 2015-16

In 2016-17 and beyondWhat happens to SFA funding depends partly on HE20% cuts imply• End of HE maintenance grants• Significant cuts to ASB ‘of which is not apprenticeships’ Contradictory policies about how to route the FE budgetDecisions may be made fairly quickly

(2) Several options for SFA funding

Several options for reform of SFA funding:

1. Devolution of budgets 2. Apprenticeship funded via employer vouchers (“discount

codes”)3. Expansion of FE loans 4. Action to reduce numbers under 21 on benefit

The bigger the reform, the less things change in the short-term!

(3) Devolution

• Strong push for local control of skills• LEPs have ESF & skills capital funding• #DevoManc • 6 Metro areas + London (40% popul)• The 39 LEPs?• 152 Counties, Unitaries & Boroughs• Scope of devolution unclear• All 16+ FE? 19+FE less Apprentices?• Could happen in stages• Strategic Area Reviews?

http://www.aoc.co.uk/news/devolution-skills-policy-and-budgets-some-practical-issues

(4) Apprenticeships

In 2015-16Apprenticeships a priority (“blue collar conservatism”)£1.6 bil apprenticeship budget (16-18 , 19+) is ring-fencedExpansion 2009 to 2013; consolidation since 2013Concern that college apprenticeships are reliant on sub-contractingOverhaul of qualifications (295 trailblazers in place by July 2015)

In 2016-17 and beyondAction to expand apprenticeships (incl. marketing campaign)“3 million apprentices” = 50% growthTransition to new qualificationsApprenticeship vouchersOpportunity in the chaos for colleges to develop new programmes?

Likely funding changes over next 2 to 3 years

Area My best guess

16-18 funding Continuing slices from the 16-18 budget

SFA funding More cuts , more apprentices, more devolution

Apprenticeships Grow, grow, grow plus big system reforms

FE loans FE loan extension but possibly not until 2017

HE Depends on how the new HE market works out

Capital LEP skills capital, possibly a re-capitalisation fund

Sources: GFE Finance records 2008/09 to 2013/14 (adjusted); Financial plans 2014/15 to 2015/16

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

6,200,0006,300,0006,400,0006,500,0006,600,0006,700,0006,800,0006,900,000

Total FE College Income

College Forecasts

29 colleges out of 242 (12%) are now rated as inadequate for financial health –increased from 15 (6%) in 2009/10

11 of the 29 were new cases from the review of financial statements for 2013/14

2 of the 29 have now merged with other colleges in April following intervention

Deterioration in financial health driven by the reduction in cash based profitability first and now reduced liquidity

New measures of financial health may see increased numbers assessed as inadequate in 2015/16

Key factors affecting profitability:• Cohort decline on 16-18 year olds• Increased competition – new 16-18 provision in schools, academies, free schools, UTCs etc.• Reducing public funding for adults• Drive to increase investment from other sources e.g. growth in 24+ Advance Learning Loans• Changes to financial contributions from individuals (adult learners)• Prioritising funding for apprenticeships and traineeships• Substantial increase in employer pension and NI contributions

OFFICIAL

Financial health of General FE Colleges

Sector borrowing has grown from £1.4bn (2009/10) to £1.6bn (2013/14) to support capital investment

Income has reduced threatening serviceability – borrowing to income has increased from 20% to 25%

22% of colleges had borrowing over 40% of income in 2013/14 – the FE Commissioner has suggested this as a warning sign

The number of colleges borrowing has increased – 25% of colleges had no borrowing in 2009/10; 15% in 2013/14

The average level of borrowing for those with some borrowing has increased marginally from £7.1m in 2009/10 to £7.6m in 2013/14

Colleges built up cash reserves but these are being used to support capital and cash deficits

Lending to the sector is dominated by Barclays and Lloyds – approx. 70% as sole lender in 2012/13; 12% was a mix of banks; Santander had less than 10%

Banks are increasingly intervening due to covenant breaches – the sector risk profile has also reduced the appetite to lend – increased reliance on Government for liquidity support for cash crises

OFFICIAL

Borrowings and banking across General FE Colleges

2012/13 2013/14 2014/15 2015/160

20

40

60

80

100

120

Outstand-ingGoodSatisfac-tory

2012/13 2013/14 2014/15 2015/160

10

20

30

40

50

60

Outstand-ingGoodSatisfactoryInadequate

These charts show the trends in financial health, using un-moderated auto-score data from the 2014/15 financial plans submitted July 2014.

General Further Education Colleges (GFEC)

Sixth Form Colleges (SFC)

2332

Moderation could, in a small number of cases, lead to changes in these

scores (eg for capital reasons)

Headlines to note: Both SFCs & GFECs

have an overall declining trend in outstanding financial health

Nationally, aggregate GFEC forecasts show an operating loss in 2013/14 for the first time ever with an aggregate deficit of £64m

43% of GFECs are forecasting an operating deficit for 2013/14

Aggregate SFC forecasts show a reduction in surpluses from £54m in 2012/13 to £30m in 2013/14

Aggregate SFC cash reserves drop from £224m in 2012/13 to £176m in 2014/15

2015/16 will see significant downward changes in funding

(apprenticeships, adult, removal of 16-18 protections)

Colleges’ own forecasts are known to be subject to optimism bias…

Falling demographic up to 2019 – already some

colleges’ student number forecasts for 2014/15 are

proving 982)

This time last year, 15 GFECs were forecasting 2013/14

financial health inadequate – the financial plans received this July confirm there are 27

During 2013/14, no SFCs had forecast inadequate financial

health – yet two financial notices to improve were

issued in May 2014 (a further two are likely in October)

… so, 2014/15 and 2015/16 outturns will be worse than figures suggest.

What does the latest college financial health analysis now show us?

How colleges will improve their finances

Some or all of the following:

1. Better government policy (funding properly matching the task)

2. Cost reduction (to bring budgets back into balance)

3. Property sales to release cash (only open to some colleges)

4. Relentless focus on student/employer demand and need

5. Outsmarting the competition

6. Strong, positive, realistic leadership

7. Consolidation of colleges and training providers

What’s on the Minister’s mind?

• 14 or 16? UTC?• Colleges; have we got the right mix?• Reorganisation of colleges; who should decide?• Qualifications; have we got the right ones?

ACTION / POLICIES ESSENTIAL PRECONDITIONS END STATE

ADEQUATE

FUNDING

A pattern of effective colleges

responding to (local) economic

need with a dual

mandate

The creation of 3 million high quality apprenticeships

All young people to have employability skills including English & maths

An end to intergenerational unemployment

A rejuvenated higher technical & professional education system

A more productive economy with higher wages and greater individual prosperity

WORKING WITH A GOVERNMENT AGENDA

STABILISE

SIMPLIFY

SUSTAIN

An employer led skills

system that is market-driven

A pattern of effective colleges

responding to (local) economic

need with a dual

mandate

ACTION

An end to intergenerational unemployment

Loans & cash advances

Grants

Area reviews

Freedom to dispose of assets

Protection 16-18 funding

Loans for adult education and maintenance

Consolidation and specialisation

MODERNISATION FUND - ‘something for something’ fund

‘Other’ ASB to be grant and lagged funding

Direct funding for off the job training in apprenticeships

Outcome agreements with LEPs/CAs

FE CommissionerSTABILISE

SIMPLIFY

SUSTAIN

ACTION / POLICIES ESSENTIAL PRECONDITIONS END STATE

STABILISE

SIMPLIFY

SUSTAIN

A pattern of high quality cost effective, open access tertiary and sixth form

colleges

ADEQUATE

FUNDING

An effective careers guidance and education system

Pathways and support to young people who have failed to achieve benchmarks by age 16

Rigorous and respected technical and academic qualifications for 16-18 year olds

Accurate assessments of value added performance taking account of student starting points

An education system that promotes excellence and opportunity for all

WORKING WITH THE GOVERNMENT AGENDA

Best use of scarce resources in dealing with demographic trends

Two Alternative Futures (1)

Money

Ofsted Grades

Finances

Reputation

Devolution

Consolidation and

Specialisation

A lot less

Down

NTIs increased

Down

Imposed

Externally driven

AUTONOMYLOST

(SCOTLAND)

Two Alternative Futures (2)

Money

Ofsted Grades

Finances

Adaptation

Devolution

Consolidation and

Specialisation

Less but not quite as much

Mediated

Stabilised

Enabled

Influenced

Internally driven

AUTONOMYRETAINED(WALES)

Allies and Alliances

• Allies

MPs Peers LAs/LEPs Think tanks Employers Media

• Alliances

ASCL and Academy Associations

College Groups AELP Wider Sector

QUESTIONS?

Questions

• Consolidation and Specialisation

Collaboration and competition Specialisation: 4/5 or 3/4/5 Area reviews Outcome agreements

• Defining Colleges

Adaptive layer? or Serving an economic community?