The 2002-3 national rates are out. So is the modelling software. There are rules on planning and some news on winners and losers. Most colleges stand to make marginal gains; most adult education services marginal losses. The new formula favours long courses over short. A one-year safety net guarantees institutions the same cash in 2002-3 as they got in 2001-2.

The LSC’s cautious approach to the 2002-3 funding formula contrasts with the Further Education Funding Council’s gung-ho approach in 1994-5. One lesson from the 1990s is that rapid change and growth can be destabilising and hit quality.

Another consideration this time is tight operating margins. Seventy pence in every college pound comes from the LSC. Ninety-nine pence is spent that year - 65 pence on pay. Colleges’ surplus is 1 per cent of total income. A small LSC variation thus automatically puts some into deficit. Given the requirement to avoid a deficit two years in a row, funding cuts translate into action to control pay. As the government wants colleges to invest in staff, it would not look good if redundancies and zero pay-rises continue.

Another lesson from the FEFC experience is that you shouldn’t focus too much on the maths. The funding formula and national funding rates are important but not the whole story.

The formula is just one stage of funding. There are also decisions about which institutions, which courses and which students, the information technology system and audit approach. The FEFC system was complex because of an arbitrary list of courses, a lengthening tariff, constant changes to which students were funded, an IT system that was hard to use and a punitive audit regime. Much of this remains.

The Department for Education took control of LSC funding issues in 1999 but took almost two years to come up with a new formula. It handed over its work in progress to the LSC in summer 2001. The formula and a new local planning system are being put into place for 2002-3 but several funding issues remain unresolved.

One big area of uncertainty is courses. Schedule 2 has gone but no one can explain what has replaced it. There will be two approved lists of national framework qualifications but these will be limited, excluding many awards. Colleges will be able to offer these but may be restricted from claiming funding for exam fees. It’s a mess, which is difficult to explain to staff, let alone students. A simpler approach would give colleges more freedom about what courses to run but holding them closer to account for how they use the money.

Another uncertainty is over extra support. The funding circulars have been quiet on how the planned matrix will work. The costs of supporting disabled students rose in the 1990s mainly because more were recruited. The FEFC met these costs until the point where colleges hit their targets, at which point funding stopped. The system worked because colleges managed demand locally. With pressure on funds and new disability legislation, this may no longer be a sustainable position.

The final uncertainty is over targets. The new national targets and local plans will inevitably lead to money being earmarked. Failure will be penalised. For the moment, there is no argument about the division at age 19 and use of clawback. The LSC’s tight budget and tough targets means it needs money from those missing targets to pay those who meet them. Unless it can negotiate more cash it will be robbing Peter to pay Paul for some time yet.

Julian Gravatt, is director of finance at the City Lit, London