North West Finance Director’s Group

1. North West Finance Director’s Group • Politics, funding, pensions and finance update • 10 October 2014 • Julian Gravatt, Assistant Chief Executive, AoC • Julian_Gravatt@aoc.co.uk • @JulianGravatt • http://www.aoc.co.uk/term/funding-finance

2. Funding timetable Autumn 2014 Party conferences, 21 September to 8 October 2014 EFA Funding Letter, October 2014 (hopefully) AoC annual conference, 18 to 20 November 2014 Autumn statement, 4 December 2014 Skills Funding Statement, December 2014 (hopefully) Spring & Summer 2015 Budget, mid March 2015 2014-15 allocations, by end of March 2015 Easter, 7 April 2015 General election, 7 May 2015 College finance conference, late May/early June 2015 Spending review, June to October 2015 (hopefully)

3. Politics and funding Before the election 2015 election and shape of further govt uncertain Decisions on 2015-16 allocations made before the election Departmental budgets fixed up 31 March 2016 Autumn statement may add or remove money “Devo Mancs” and “Northern Powerhouse” After the election Post-election 2015 spending review (budgets from 2016-17 onwards) Demography: More children now + more old people = post-16 squeeze Cross-party agreement: closing deficit, cutting taxes & protecting NHS Spending likely to dip around 2018

4. The bigger spending picture Government plans Big ticket spending rises Pensions, interest, NHS etc Deficit reduction via RDEL cuts Unprotected departments 9.1% of GDP (2013-14) 7.8% of GDP (2015-16) 5.4% of GDP (2018-19) Spending cuts c30-40% to come Loans may be a safe haven x

5. The DFE budget after 2015 DFE’s cash crunch: too many schools, pupils & promises 2015 to 2020: 11-16 pupils +10%, 16-18s population -8% Pressure for devolution (councils, combined authorities or LEPs?) Core 16-18 funding system continues until a new one is in place

6. EFA 16-18 funding, 2015-16 Process 16-18 funding letter due shortly Same systems (rates * lagged numbers * historic funding factors) ILR data vital (R15 in October, R04 in December) EFA will confirm allocations by March 2015 Issues EFA needs to fund costs of study programmes (more FT students) If cuts are necessary, EFA has to cut rates, numbers or weightings New A-levels, new Tech Levels in 2015-16 Various implementation issues (GCSE Maths/English, free meals, large programmes, sub-contracting etc)

7. BIS budget BIS budget in 2015-16 £14 bil Student Loans £13 bil DEL HEFCE + Grants + Science £8 bil 19+ FE/Skills budget £3.5 bil Various contradictory options are in play 1: Devolve skills & DWP budgets to local govt or LEPs 2: Employer-routed funding for apprenticeships3 3: Expansion of FE loans to 19 year olds & Level 2 4: New earn-or-train options for under 21s on benefit 5: New SFA funding approach

8. SFA funding, 2015-16 Process Skills funding statement due in December 2014 SFA decisions needed on 2013-14 reconciliation & 2014-15 requests Devolution may start to apply (councils or LEPs) Core SFA funding system continues until a new one is in place Issues BIS may need further cuts to SFA and/or HEFCE budget in 2015-16 Apprenticeships continue to be the first priority Trailblazers will be in their second year (well-funded in 2014-15) Traineeship funding approach may be revised Various implementation issues (ESOL, online learning, 24+ loans)

9. Pensions and budgets • Cost of employing a teacher to rise by 5% plus any payrise • TPS • 15 year recovery period • Lower discount rate • High pay growth assumption • 2015 reforms don’t save enough • Costs Colleges 1% of income • National insurance • DWP simplifying state pension • Removal of an NI relief • £5 bil extra NI • Costs Colleges 2% of income

10. Pension income and pension tax Individuals Tax limits on saving Annual (AA) £40k Lifetime (LTA) £1.25mil 16* salary in DB scheme Pension reforms now Tax relief could change State pension SPA rises to 67 by 2028 New state pension in 2016 No contracting out = higher NI New public sector schemes Career average entitlement New accrual & indexation Post-reform service link to SPA Pre-reform service protection New cost-sharing arrangements Limited college choice TPS or LGPS State pension

11. Financial health • College finances • Deficits in 2012-13 (48% operating deficits, 10% cash based deficit • Ofsted-related spending + capital projects = short-term deterioration • Staff costs 60-65% of income • Rising costs & falling income • How Colleges need to respond • Understand your position, your environment and your risks • Relationships with SFA, EFA, Council, MP and your bank • Cashflow management, risk management & financial analysis • Governing bodies responsible for solvency & viability of college • Use AoC’s ETF-funded governance support programme • Think about opportunities and what comes next

12. On a more positive note... • Opportunities • Colleges have friends and allies • Education and skills matter both to the recovery & to society • Government will still be spending £70+ billion on education in 2020 • Income generation opportunities exist • Quality counts • Productivity improvements from IT only partly realised in education • There are some relatively simple things that can still be done • Two reminders • AoC Winter Finance Conference, 9 December • http://www.aoc.co.uk/events/aoc-winter-finance-conference-leeds • Information on funding, accounting, CFDG etc • http://www.aoc.co.uk/term/funding-finance