In the latest example of severe financial problems in the further education sector, Thomas Danby College admitted it has overspent in the past year.

A survival plan to recoup the deficit is being considered by the Further Education Funding Council. Earlier warnings to control spending were given in August when management were called in to the FEFC.

Since the spring, the deficit had been rising at the rate of about Pounds 200,000 a month, according to Alan Bailey, branch officer of the lecturers’ union NATFHE.

A college management source blamed the financial troubles on the difficulties faced by managers taking over responsibility for substantial budgets after years under local authority control.

Colin Couble, acting chief executive, said: “We are running a deficit, but so do many other colleges in the country under the new funding arrangements. This doesn’t affect the service we offer to out students or the long-term viability of the college.”

Stringent monitoring and control systems were in place which guaranteed the college’s financial stability, said Mr Couble.

Thomas Danby in Leeds is currently in dispute with staff over threatened redundancies - 10 have already taken voluntary severance but six or seven more may face compulsory redundancy. The college’s principal is to take early retirement at the end of the month.

Further evidence of the scale of the financial problems dogging the sector is the situation at North East Surrey College of Technology where the deficit at the end of the last financial year is reported to be Pounds 800,000.

NATFHE representatives at the college claimed the size of the deficit places the college 45th worst out of 48 colleges in debt. A recovery plan has been drawn up by managers.

College accounts just released by the FEFC reveal 58 colleges had negative balance sheets. The funding council admits 40 colleges are in serious financial difficulty.

Publishing the latest statistics, the FEFC acknowledges: “Many colleges in the further education sector consider their current level of balances represents an insufficient contingency reserve.”

But it insists most colleges in financial trouble have inherited all or part of their deficit from their local authority.

Details of the state of college finances have been published as it emerged more than a third of colleges are forfeiting some funding this year because they miscounted student numbers.

A total of 167 colleges are effectively having to hand cash back to the FEFC this month after receiving too large a grant in the past on the basis of inflated enrolment figures for 1993-4.

The first full external audit of colleges’ funding claims has revealed 169 contained flaws or errors.

In 71 cases, the claims gave “particular concern”, including 13 where “significant” amendments were needed. In five colleges, fully audited accounts revealed funding claims to have been more than f5 per cent too high.