Shetland Islands Council's development committee, which is responsible for the colleges, heard last week that Shetland College in Lerwick is effectively insolvent and that funding for the North Atlantic Fisheries College in Scalloway is uncertain after this year.
A "best value" review by the council had strong criticisms to make of the lack of strategic planning in both colleges and it concluded that "current arrangements are not financially sustainable in the long term". The cost of running them is put at pound;4.7 million.
Shetland College is run by the islands council and not incorporated, but its cash none the less comes from the Scottish Further Education Funding Council. It is therefore moving from historic block funding to the regime operated for the incorporated colleges which depends on their ability to attract students.
This "student unit of measurement" (SUM) will mean a loss of pound;500,000, the college says. It has already had two emergency injections of cash from the council totalling pound;409,000 and has had to submit a recovery plan to the funding council.
The fisheries college remains dependent on council goodwill, and has also been receiving so-called emergency funding since February last year. The management agreement between the council and the Fisheries Training Centre Trust, by which the council agrees to fund the trust so it can operate the college, ends this year.
The two colleges are also set to lose funds from European sources.
Alvin Bashforth, Shetland's director of development, suggested an amalgamation might be the answer. A report to councillors also proposed a "college management unit" within his department to improve the situation.
But councillors voted not to discuss the issue, pending further consultation. An HMI report on Shetland College is due to be published on March 8 and the response to its recovery plan from the funding council is still awaited, both of which appeared to influence the development committee to delay any decisions.
The claim that Shetland College is insolvent came from Gussie Angus, an islands councillor who had previously failed in an attempt to have the report's recommendations approved.
But Gordon Dargie, principal of Shetland College, told The TES Scotland that all parties want to see a resolution. "Neither the islands council nor the funding council wishes to see us go out of business," Mr Dargie said.
He criticised the short time given to change the college's funding regime, which meant a 36 per cent cut. "Talk of closure is overstating it at this stage. The importance of getting it right and getting a stable basis for going forward cannot be overstated, however, and the council is rightly planning for significant changes to be made."
A spokesperson for the funding council said it was still reviewing the college's recovery plan. "We can confirm that we will be working with the Shetland Islands Council to ensure the future financial and academic stability of the college," she said.
FAILING THE BEST VALUE TEST
The two colleges come in for severe criticism from Shetland's "best value" review.
Shetland College "does not set measurable objectives against its mission statement" and "is not specifically focused on identified market need". Student numbers - crucial to funding - were falling and there was a high drop-out rate from courses.
The college was also found to be lacking in accessibility, flexibility to the needs of local businesses and effective management. It had been impossible to obtain a copy of management accounts, and "no information was available on the unit cost of the delivery of courses".
At the North Atlantic Fisheries College, a positive image with local business, flexibility and world-class research went some way towards compensating for a lack of strategic management, the review found.