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How the colleges are financed

Roger McClure explains the intricacies of the system which funds the vast diversity of courses, students and institutions nationwide.

The Further Education Funding Council is the main source of revenue funding for the colleges in its sector. It makes a revenue allocation to each college each year and in return for which the college agrees to provide at least a given amount of education and training.

Further education is extremely diverse in the types of courses run, the range of subjects, the different students, and types of colleges. The Council has therefore adopted a standard unit of education and training, called a funding unit, which enables the total amount of each college's programmes to be expressed on the same comparable basis.

Education and training programmes are converted into funding units by means of a tariff which gives standard values of units to different aspects of provision such as full-time and part-time attendance and the different subjects. The values of units available in the tariff reflect also each student's progress through their learning programme, whether they achieve their qualification aim, whether they require significant additional learning support from their college; and the need to give full fee remission to students from low-income families.

The tariff has been set up so that a full student on a low cost programme, who completes the programme in one year and achieves their qualification aim is equivalent to 100 funding units. A student who drops out in the middle of their programme would earn a smaller number of units for the college, while a student on a high-cost programme, for example, in engineering, would earn a higher number of units provided they completed the programme and achieved the qualification aim. The total provision of the smallest colleges in the sector is equivalent to less than 100,000 units. The average is about 300,000 to 500,000 units.

The Council's funding of colleges has two strands -the demand-led element and the main allocation The demand-led element is intended to encourage colleges to expand, particularly in areas where there is demand and their marginal costs are low. It is paid at a flat rate per unit for every unit a college generates in a given year. For 1994-95, the rate is Pounds 6.50 per unit which is about one third of the average total level of funding per unit across the whole sector. There is no limit to the amount of demand-led element a college can earn in a year because the funds are paid out of a non-cash-limited vote. All units generated by a college qualify for the demand-led element including those for a student achieving their qualification aim, for additional support, and for fee remission.

The main allocation for each college each year is a specific amount of funds tied to an agreed target of funding units. Each college is guaranteed 90 per cent of its previous year's main allocation in return for 90 per cent of its previous year's target funding units. These guarantees are called the core funding and core units for the coming year and they form the baseline from which each college can apply to the Council for additional funds and units. The additional units above the core are offered by the Council at a standard rate of funding. For 1994-95, the standard rate was Pounds 8.00 per unit which, together with the demand-led element of Pounds 6.50 per unit, gave a combined rate of marginal funding of Pounds 14.50 per unit. These values are enhanced for London area colleges .

Colleges' application for additional units above the core are required to meet certain validation criteria such as the programmes for which funding is sought being eligible for funding by the Council. Most importantly, the Council checks to see whether each college's application for additional units is broadly consistent with the developments in its education and training programmes set out in its strategic plan.

Colleges' main allocations have to be met out of a cash-limited vote and the Council has agreed criteria in consultation with the sector for selecting applications when the demand for funds exceeds the sum available. There are four criteria: * success at achieving the previous year's target; * quality assessments by the Council's inspectorate; * the contribution to specific priorities identified in advance by the Council; * the average of Council funding perunit achieved by the college inthe current year.

The last of these criteria, the average level of funding unit, is brought into play once the other criteria have been applied. If the tariff is functioning correctly, there should be no justification for the Council paying significantly more per unit to one college than another. In practice, however, colleges currently have widely differing average levels of funding reflecting the relative generosity of their former local education authorities. The disparity in the funding levels inherited by the Council was so wide that the Council did not consider it feasible to align them straight away. To have done so would have meant reductions in funding to many colleges big enough to have been destabilising. Instead the Council has set an objective to converge the range of funding levels to an acceptable range over three years. This gives colleges with high average levels of funding time to adjust their operations either by reducing costs or by increasing their activity so as to bring their average level of funding per unit into line with other colleges. At the same time, colleges, which have inherited low levels of funding will be able to increase their average level of funding.

The Council will review the key parameters in its methodology each year to ensure that its funding objectives are achieved. Any change in the rate of funding for the demand-led element would need to be agreed with the Department for Education and the Treasury.

The total funds allocated to each college and the target of funding units accepted by the college are set out in an annual funding agreement between the Council and each college. Under the agreement, the college is expected to try to achieve its strategic plan for the year in question, subject to responding to unforeseen developments. In addition, it is expected to achieve at least its target of funding units. There is no restriction on the number of units by which it can exceed its target, earning demand-led element funding for each unit, but if it falls short of its target, its funding will be reduced at the standard rate of funding for each unit by which it falls short. It will receive no demand-led element either for the units by which it falls short of its target so that funding is lost at the combined rate of Pounds 14.50 for each unit by which it fails to achieve its funding agreement.

To provide year-on-year stability, a college cannot lose any of its main allocation or demand-led element below the core level even if the total units it generates are less than its core units for that year.

Roger McClure is director of finance at the FEFC

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