After a decade of government funding cuts and despite five months of pandemic shutdowns, colleges in England reported marginally better financial results for the 2019-20 academic year than for the year before that.

So, what went on and what does that tell us about the sector’s prospects?

Before I start, I should explain the data I’ve been looking at. At the end of May 2021 - four months after the 2019-20 filing deadline - the Education and Skills Funding Agency put a vast spreadsheet on its website with financial data from the accounts of 217 colleges. The ESFA didn’t, and doesn’t, offer any commentary on the numbers, so it’s left to armchair auditors like me to add up the numbers and make sense of them. Here’s what I’ve found.

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College funding: The decline in income

The first thing to understand about 2019-20 is that the English college sector experienced a big decline in income - a fall of £260 million or almost 4 per cent. I can’t be precise about this because there are a couple of late accounts, including two from the insolvent Kent colleges run by Department for Education-appointed administrators throughout the year in question.

A small part of the drop relates to the conversion of three sixth-form colleges to become 16-19 academies during the year, but there’s no question that the fall in income was a big thing in 2019-20 and also that this was something that was happening before the pandemic struck.

The population of 16- to 18-year olds reached a low point in 2019. This, combined with the sixth year of no inflation adjustment to funding and competition from sixth forms promoted and subsidised by the department, resulted in a £230 million fall in 16- to -18 funding at FE colleges.

In addition, there appears to have been a £30 million fall in adult education income, resulting partly from the shake-out associated with devolution.

Covid: The impact of the pandemic on colleges

I always said that 2019-20 would be a difficult year financially (I think I may say this most years) but then the pandemic hit. 

Interestingly, the impact on finances in the first five months turned out to be not as bad as feared. At AoC we predicted a £150 million hit to income. Looking at the figures for fees, catering and apprenticeships, I’d say now it was more like £100 million down.

Government action to stabilise things helped in 2020 and colleges drew down a total of £32 million in job retention scheme funds, which averted and minimised redundancies. Colleges were also able to make short-term savings when buildings were closed. The worry in the next 12 months from now is that an ill-considered approach to adult education targets and a return to 0 per cent inflation assumptions after the one-off 16-18 boost in 2020-21 will set the sector back when the political promises suggest otherwise.

Are things better?

So, given the fall in income, why did I say at the start that things were marginally better on the financial front in 2019-20? This is because margins have improved. The key “education EBITDA” measure used by the ESFA to measure operating performance shows a 1 per cent rise for the average college to 6.6 per cent of income. Colleges knew in 2019 that they faced income reductions so held down staffing costs then. They implemented the restructuring plans associated with area review era mergers, kept development projects to a minimum to conserve cash and paid back loans owed to banks and the DfE (still owed £120 million in restructuring debt as of 31 July 2020).

The National Audit Office commented in 2020 on an improving picture in college finances up to 2018-9. The 2019-20 results show this improvement continued though, as the NAO also explained, but the by-product has been less course choice, cuts in support for students and building maintenance problems deferred. All those commissioner reports, financial recovery plans and DfE-mandated independent business reviews had an impact. Governing bodies and college leaders got the number one message from the DfE, which was that costs must stay below income.

Averages can mislead when it comes to understanding colleges because everyone is unique. Most colleges experienced a decline in income but some continued to grow. Average margins improved but one-quarter of colleges are still judged to have the lowest two financial ratings which - until the rules don’t change - means more scrutiny and intervention. The college financial recovery industry has grown in recent years but is a bit short of remedies. Between 2015 and 2017, colleges were encouraged to increase apprenticeship numbers but these have proved financially tricky where they involve real training. Costed curriculum plans help colleges to identify unremunerative courses and campuses that don’t make a financial contribution, but decision-making needs to consider local economics and politics as well as the college’s own budget.  

Collect less, analyse more

Looking ahead, summer is the time when colleges finalise budgets and this year’s accounts. Three-quarters of colleges enrolled more 16- to 18-year-olds this year and this will translate into higher funding next year though, for some, there will be an off-setting fall in apprenticeship income. Combined authorities in West and South Yorkshire get control of adult education funds this year, which will bring its plus and minus sides. Meanwhile, this summer’s teacher assessment for A levels, Btecs and other qualifications brings new uncertainty to higher education recruitment.

Meanwhile, the tough Treasury line on public spending visible in the adult education budget threshold decision or the education recovery plan rather dampens the optimism created by the FE White Paper. And, if nothing else, people running colleges are a bit tired of bids and the never-ending bureaucracy.

What this will all mean for the numbers is anyone’s guess. It’s good that colleges are so transparent with their finances so are better informed than other sectors, but it’s a shame there’s no official commentary. The Office for Students publishes reports on university finances while the Scottish auditor general comments on colleges in Scotland. Last year’s NAO report was an excellent contribution to our collective knowledge but was a one-off.

In my view, if the DfE and the ESFA are serious about moving on from promises and hunches to getting real value from the £5 billion the government spends on colleges, “collect less, analyse more” would be a good start.

Julian Gravatt is the deputy chief executive of the Association of Colleges