Colleges with 'inadequate' finances on the rise

Exclusive: 1 in in 7 colleges has 'significant risk of not being able to meet current obligations', finds Tes analysis

One in seven colleges is in 'inadequate' financial health when the ESFA's scoring system is applied

One in seven colleges is in such financial difficulty that it is likely to be “dependent on the goodwill of others, with a significant risk of not being able to meet current obligations”, Tes analysis shows.

Applying the Education and Skills Funding Agency’s (ESFA) way of scoring college financial health on the most recent available college accounts (for the academic year 2017-18) reveals that about 14 per cent were in inadequate financial health at that point – about one in seven. That is more than the previous year, when the proportion stood at one in eight. Of the 258 colleges for which data is available (some of which have since merged), 37 were inadequate and 58 required improvement. Only 71 were outstanding, with 92 good.

This does not equate to the institutions actually being currently rated "inadequate" - colleges can have their ratings adjusted, for example on the basis of a change in circumstance or merger. Their rating may also have changed since the accounts were compiled. 

The findings follow Hadlow College and West Kent and Ashford College becoming the first two institutions to go into education administration, under the college insolvency regime. Neither of these institutions was rated inadequate in 2017-18 under the ESFA scoring system. 

Last month, an independent review of how the government monitors colleges’ finances and financial management got under way.  The review, revealed by Tes in May, will be carried out by Dame Mary Ney.


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The increase in college funding

The ESFA’s scoring system considers solvency – the ratio between current assets and current liabilities, performance – earnings before interest, tax, depreciation and amortization (EBITDA) as a percentage of adjusted income, and borrowing as a percentage of adjusted income.

Bringing those three factors together, colleges are given a score. Institutions with outstanding financial health have “very robust finances to meet current obligations and respond successfully to opportunities or adverse circumstances”, says the ESFA, while those with good financial health have “sufficiently robust finances to meet current obligations and respond successfully to most opportunities or adverse circumstances”. Just under two-thirds of colleges would have received those scores on the back of their 2017-18 accounts.

Over one in five colleges would be scored “requires improvement”, meaning they have “sufficient resources to meet current obligations but a level of risk to financial health, with limited capacity to respond successfully to opportunities or adverse circumstances, which corporations need to address.”

The analysis confirms sector concerns about the financial sustainability of colleges, owing to a real-terms decrease in funding in recent years. Last month, it was announced colleges would benefit from a £400 million funding package, and the 16-18 funding rate would be increasing in 2020-21 after being frozen for seven years.

University and College Union head of further education Andrew Harden said: “That so many colleges are in inadequate financial health is worrying and shows the impact of years of underinvestment. Whilst the proposed £400 million in funding is a step in the right direction, this is clearly not enough to plug the current funding gap and cuts of £3 billion over the last decade. We expect colleges to use the money being made available to prioritise staff pay, which has fallen by 27 per cent since 2009.”

'A complicated situation'

The Association of Colleges' deputy chief executive, Julian Gravatt, said the ESFA’s financial health grade was “a single measurement of a complicated situation”. He said it was striking that colleges did worse on the solvency measurement, which counts up current assets versus current liabilities. “Given that colleges get an average of 80 per cent of their income from government, this is largely a reflection of the fact that government is a bad payer across several funding streams. The worst cases by year-end are apprenticeships and capital funding but mid-year ESFA underpays colleges for 16-18 education and [adult education budget] while the Student Loans Company holds back 50 per cent of HE fee loans until May.”

He added these are the automated grades for one year only (2017-8), and a bad grade could also be a reflection of factors like pre-merger write-offs and merger costs.

James Kewin, deputy chief executive of the Sixth Form Colleges Association, said the £400 million investment was "a very welcome foundation on which to build". "A bigger, longer-term funding deal is required to ensure colleges - and more importantly students - receive the level of investment they need to flourish," he added. 

"Last year, London Economics found that in real terms, the average sixth form college recorded a net deficit of £110 per student compared to a net surplus of £190 per student in 2010-11. The new ministerial team at DfE has done more to address the financial pressure on the sector in two months than their predecessors managed in nine years, but as these figures illustrate, more funding is needed to address the sustained period of underinvestment colleges have faced since the start of the decade."    

Funding boost

A Department for Education spokesperson said: “Further education and skills is a top priority for this government which is why the prime minister and education secretary recently announced a major funding boost for our sixth forms and colleges – the single biggest annual uplift since 2010.

“This investment will make sure we can continue to develop world-class technical and vocational education to rival countries on the continent so we have a highly skilled and productive workforce for the future.”

 

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