An analysis by the Scottish Further Education Funding Council shows only 20 colleges are forecasting an operating deficit in 2002-03, compared with 37 that were in deficit in 1998-99 and 33 in the current financial year. The overall operating deficit should decline from 5.2 per cent of total college income in 1998-99 to 0.3 per cent in a couple of years’ time.

The council, which is due to appear before the Parliament’s audit committee shortly to provide a progress report on the colleges’ financial position, also calculates that accumulated income and expenditure will move from being pound;16.8 million in the red in 1998-99 to having a pound;561,000 shortfall by 2002-03, “further supporting the assertion that the financial health of the sector is improving”.

College income in the current financial year is already 17 per cent higher than two years ago as a result of the Government’s first three-year spending review. The increases for the next two years are a more modest 2.5 per cent and 4 per cent, although this does not take account of additional public sector spending decisions announced in September.

The audit committee’s report last February painted a bleak financial picture of the sector and demanded the funding council carry out a “root and branch” review to be reported back to the committee by the end of last year. The report revealed a pound;22 million deficit in 1998-99 and identified 10 colleges where the situation was so dire that financial recovery plans had to be drawn up.

The latest forecast from the funding council however, estimates that the operating deicit will be cut to pound;1.8 million by 2002-03.

However, if colleges’ financial health is judged according to “historic costs”, taking account of tax, assets and other factors, the deficit moves from pound;12.2 million in 1998-99 to surpluses of pound;1.8 million in 2000-01, pound;4.9 million in 2001-02 and pound;8.6 million in 2002-03.

Another positive indicator is that borrowings are likely to fall by 14 per cent a year from 2001, when they should reach pound;48.5 million, before falling to pound;41.5 million in July 2003.

But the funding council notes that these figures are for the sector as a whole, which “does mask the wide range of circumstances at individual colleges”. Colleges are not named in the council’s report.

Professor John Sizer, the council’s chief executive, believes that financial forecasting has been refined to give a more meaningful assessment of colleges’ overall financial position. A baseline has been established which will be used to improve monitoring in the future.

But he said that the funding council intends to issue additional guidance to colleges since most did not adequately back up explanations of their forecasts or movements with hard figures so there could be a check on whether the assumptions underlying them are “sound and reasonable”.

One area that is still causing the council unease is payroll costs, which account for 60 per cent of college expenditure. It points out that a 1 per cent increase in pay levels would add pound;3 million to FE spending in 2000 01 when a surplus of only pound;1.8 million is projected.

“It is important for colleges to have a plan of corrective measures to adopt when necessary to cope with adverse financial conditions relative to those that have been forecast,” the council’s report states.

Leader, page 18