North West Finance Director’s Group

Politics, funding, pensions and finance update

10 October 2014

Julian Gravatt, Assistant Chief Executive, AoC

Julian_Gravatt@aoc.co.uk

@JulianGravatt

http://www.aoc.co.uk/term/funding-finance

Funding timetable

Autumn 2014Party conferences, 21 September to 8 October 2014EFA Funding Letter, October 2014 (hopefully)AoC annual conference, 18 to 20 November 2014Autumn statement, 4 December 2014Skills Funding Statement, December 2014 (hopefully)

Spring & Summer 2015Budget, mid March 20152014-15 allocations, by end of March 2015Easter, 7 April 2015General election, 7 May 2015College finance conference, late May/early June 2015Spending review, June to October 2015 (hopefully)

Politics and funding

Before the election2015 election and shape of further govt uncertainDecisions on 2015-16 allocations made before the electionDepartmental budgets fixed up 31 March 2016Autumn statement may add or remove money“Devo Mancs” and “Northern Powerhouse”

After the electionPost-election 2015 spending review (budgets from 2016-17 onwards)Demography: More children now + more old people = post-16 squeezeCross-party agreement: closing deficit, cutting taxes & protecting NHSSpending likely to dip around 2018

Government plansBig ticket spending risesPensions, interest, NHS etcDeficit reduction via RDEL cuts

Unprotected departments9.1% of GDP (2013-14)7.8% of GDP (2015-16)5.4% of GDP (2018-19)Spending cuts c30-40% to comeLoans may be a safe haven

The bigger spending picture

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The DFE budget after 2015

DFE’s cash crunch: too many schools, pupils & promises 2015 to 2020: 11-16 pupils +10%, 16-18s population -8%Pressure for devolution (councils, combined authorities or LEPs?)Core 16-18 funding system continues until a new one is in place

EFA 16-18 funding, 2015-16

Process16-18 funding letter due shortlySame systems (rates * lagged numbers * historic funding factors)ILR data vital (R15 in October, R04 in December)EFA will confirm allocations by March 2015

IssuesEFA needs to fund costs of study programmes (more FT students)If cuts are necessary, EFA has to cut rates, numbers or weightingsNew A-levels, new Tech Levels in 2015-16Various implementation issues (GCSE Maths/English, free meals, large programmes, sub-contracting etc)

BIS budget

BIS budget in 2015-16£14 bil Student Loans£13 bil DEL HEFCE + Grants + Science£8 bil

19+ FE/Skills budget £3.5 bil

Various contradictory options are in play1: Devolve skills & DWP budgets to local govt or LEPs2: Employer-routed funding for apprenticeships33: Expansion of FE loans to 19 year olds & Level 24: New earn-or-train options for under 21s on benefit5: New SFA funding approach

SFA funding, 2015-16

ProcessSkills funding statement due in December 2014SFA decisions needed on 2013-14 reconciliation & 2014-15 requestsDevolution may start to apply (councils or LEPs)Core SFA funding system continues until a new one is in place

IssuesBIS may need further cuts to SFA and/or HEFCE budget in 2015-16Apprenticeships continue to be the first priorityTrailblazers will be in their second year (well-funded in 2014-15)Traineeship funding approach may be revisedVarious implementation issues (ESOL, online learning, 24+ loans)

Pensions and budgets

Now By 2016

TPS employer 14.1% 16.48%

NI employer (approx)

10.4% 13.8%

Employer on-costs 26% 33%

Staff cost ratio 63% ?

Cost of employing a teacher to rise by 5% plus any payrise

TPS15 year recovery periodLower discount rateHigh pay growth assumption2015 reforms don’t save

enoughCosts Colleges 1% of income

National insuranceDWP simplifying state pensionRemoval of an NI relief£5 bil extra NI Costs Colleges 2% of income

Now By 2016

TPS members (avg) 9.6% 9.6%

NI employee (approx)

10.6% 12%

Pension income and pension tax

State pension

State pension

TPS or LGPS

TPS or LGPS

State pensionSPA rises to 67 by 2028New state pension in 2016No contracting out = higher NI

New public sector schemesCareer average entitlementNew accrual & indexationPost-reform service link to SPAPre-reform service protectionNew cost-sharing arrangementsLimited college choice

Tax limits on savingAnnual (AA) £40kLifetime (LTA) £1.25mil16* salary in DB schemePension reforms nowTax relief could change

Financial health

College financesDeficits in 2012-13 (48% operating deficits, 10% cash based

deficitOfsted-related spending + capital projects = short-term

deterioration Staff costs 60-65% of incomeRising costs & falling income

How Colleges need to respondUnderstand your position, your environment and your risksRelationships with SFA, EFA, Council, MP and your bankCashflow management, risk management & financial analysisGoverning bodies responsible for solvency & viability of collegeUse AoC’s ETF-funded governance support programmeThink about opportunities and what comes next

On a more positive note...

OpportunitiesColleges have friends and alliesEducation and skills matter both to the recovery & to societyGovernment will still be spending £70+ billion on education in 2020Income generation opportunities existQuality countsProductivity improvements from IT only partly realised in educationThere are some relatively simple things that can still be done

Two remindersAoC Winter Finance Conference, 9 December

http://www.aoc.co.uk/events/aoc-winter-finance-conference-leeds

Information on funding, accounting, CFDG etchttp://www.aoc.co.uk/term/funding-finance