More than one in eight further education colleges are technically bankrupt, according to figures due to be released today.
Fifty-eight colleges are in such a critical financial state that if they were ordinary businesses operating under company Acts they would be declared insolvent.
The new statistics, based on financial forecasts drawn up by all colleges last March, will send a shudder through a sector already clamouring for more Government cash amid fears it will lose out to schools in the funding race.
Suspicions have long been rife over the seriousness of cash problems in some colleges, but the extent of the crisis uncovered in the latest figures is likely to prompt surprise and alarm.
The data was also expected to show almost three-quarters of the sector ran at a loss last year. In their March mid-year forecasts, 303 colleges - 70 per cent - predicted an operating deficit by the year's end in August. The number actually reporting deficits from the previous year, 1993-4, was 204 - just under half the FE colleges. The new figures highlight a significant deterioration in the state of finances across the sector since last year.
As questions were being raised over why the data had not yet been made public, the Further Education Funding Council refused to make any comment on the leaked figures, which were revealed to members of the council last week.
A spokeswoman said the council would be publishing information on colleges' financial health, believed to include analysis of the mid-term forecasts, in today's edition of Council News - the monthly information circular it sends to colleges.
Evidence of the sector's cash problems has emerged at a tense moment in the financial year - just weeks before the November public spending round.
It is understood that the Education and Employment Secretary Gillian Shephard, who has already been negotiating with the Treasury, is likely to win some extra money for schools, following John Major's pledge to make education a priority in the run-up to the general election.
But that victory is likely to be at the expense of either further education colleges or Training and Enterprise Councils - not perceived as vote-winning areas. Both have been jockeying for favour with Mrs Shephard, whose leaked draft submission to the Chequers Strategy Cabinet this month specifically indicated fears over the political impact of under-resourcing in schools, while also warning that halting growth in the "dynamic FE sector" would be difficult to defend.
Further education colleges have come off comparatively well in the cash contest since their removal from LEA control in 1993, when they were guaranteed funding growth of 16 per cent over three years. The growth period is due to end on March 31.
But, coupled with a demand for 25 per cent growth in student numbers and other efficiency drives over the same period, the net effect is the equivalent of a 5 per cent cut.
The troubled state of some colleges' finances is confirmed in a forthcoming report from Terry Melia, the chief inspector for the FEFC. The document, leaked to The TES last week, revealed many colleges are facing "a downward funding spiral" after missing growth targets. While management and other problems are highlighted, the report makes clear that colleges are not wholly to blame, with some in no position to cope with the dual demands of expansion and cost-cutting.
Opposition parties are preparing to capitalise on the latest college finance figures with further accusations of Government underfunding of FE and calls for more investment. Labour FHE spokesman Bryan Davies said: "The funding efficiency gains imposed by the Government are beginning to bite earlier than ministers expected."
The statistics clearly indicated "the complete failure of the market-driven approach", said Liberal Democrat education spokesman Don Foster.