To outsiders, it may have sounded like a formality, but the decision by the Office for National Statistics (ONS) to reclassify Scottish colleges sent shockwaves across the sector last month.

As public bodies, colleges will, from 1 April 2014, be part of the Scottish government for financial budgeting and reporting purposes. Although the full impact of that change is yet to be determined, there is no doubt that, at the very least, it will create an additional burden while colleges are going though the most dramatic reform process in decades.

Colleges will have to align their financial year to that of the government. Other accounting and financial reporting practices will also have to be adjusted, which may sound mundane, but the impact will go far beyond statistical reporting. The change also means all college income and expenditure, including that funded privately from an institution’s own reserves or through borrowing, will be seen as public money.

Especially when it comes to colleges that currently hold considerable reserves, this could have a seismic impact. Often accumulated over a number of years, they could now be seen as government money, and therefore anything spent from these reserves would count as spending from the government’s budget and all the scrutiny that comes with it.

Indeed, in a worst-case scenario, the changes could mean colleges are forced into spending their reserves before the changes come into effect, or lose them.

But the reform will also affect the ability of colleges to create new reserves and generate other income - which currently accounts for a quarter of colleges’ total budgets. After years of severe cuts to their government funding, many colleges created additional income streams and were planning to rely more heavily on those to supplement their funds.

However, while they may still be able to do that, after 1 April there will be limited, if any, ways of rolling any surpluses forward into a new financial year. This means that any profits made will have to be spent swiftly - no more saving for a rainy day or for a major capital build. The ONS’s reclassification will also affect colleges’ ability to borrow from commercial sources, a move that could also impact construction projects.

The decision has not been without its critics. Education secretary Michael Russell described it as “unwelcome and unhelpful”, and John Henderson, chief executive of Colleges Scotland, said that it had “the potential to have a significant impact on colleges in Scotland”.

“For example, moving colleges out of the private sector could both restrict and act as a disincentive to colleges continuing their commercial and international activity, which benefits employers and learners,” he explained.

Others in the sector found stronger words: One principal told TESS the announcement was “a disgrace”. “The decision moves FE colleges back 20 to 30 years.”

The timing of reclassification is far from ideal. Numerous colleges are approaching mergers later this year, and the regionalisation process is ongoing across Scotland. At the same time, staff in the sector are trying to come to terms with serious and continuing budget cuts and demands on them resulting from the government’s commitment to provide a place in education, training or work to every 16- to 19-year-old.

“We asked our UK counterparts (in the ONS) to recognise the wide-ranging reforms colleges are currently delivering, and to at least defer implementation until the reform programme was substantially complete,” Mr Russell explained. “We made clear the risk of forcing change in such a short time frame, and a time of substantial reform, but have received no flexibility on this point.”

In addition to being concerned about the potential impact of the reclassification, many in the sector also feel that the government should have informed colleges earlier of the ONS decision. Ministers have been aware of the possibility of college reclassification since 2010, and TESS understands that college leaders received a letter at the time to alert them to this. However, one principal said it had given the impression the issue would be “nothing to worry about”.

But Mr Russell said: “Full engagement with the sector could only be meaningfully undertaken once the Treasury (ONS) had clarified its position on these issues”.

These contradictions have fired much debate in the sector over whether this decision could have been avoided. The government stresses the UK ONS’s reclassification decision was the consequence of the current level of ministerial control and was not impacted by the proposed changes to college governance in the post-16 education bill. Avoiding the decision would have been possible only through legislative changes to remove government control - a move seen as counteractive to the government’s current vision for the sector.

“The successful outcomes delivered by our colleges are founded on a partnership between government and colleges,” Mr Russell said. “A partnership that has its roots in existing governance arrangements - themselves the cause of reclassification. Avoiding reclassification by following the path taken elsewhere in the UK would weaken the relationship between government and the sector,” he said. He added that it would undermine the government’s ability to sustain the continued delivery of shared goals for the sector. “We will not allow our education policy to be driven by accounting practice instead of educational priorities.”

Government plans for improved governance in the post-16 bill were “the right solution for Scotland and are appropriate given the very significant public investment in colleges”, Mr Russell said.

In England and Wales, the impact of the ONS’s decision on colleges is being mitigated by changes to the relevant legislation.

“In England, they are planning to appoint an FE commissioner with extensive powers of intervention,” a sector expert told TESS. “This is inevitable since their fix for the ONS means placing colleges even more into a competitive marketplace, and therefore enhancing the prospect of some college failures. Do we really want to contemplate having to dissolve failing colleges in Scotland?”

In a regionalised sector, this could mean the failure of an entire regional college with the consequent impact this would have on provision in that geography.

With the 1 April 2014 date looming, ministers, together with sector representatives and experts from the Scottish Funding Council, are now left hunting for solutions on how to implement the change in a way that is “least unsettling for colleges”.

“We are confident that working together with the sector we can mitigate the risks of the decision,” Mr Russell said. “Scottish ministers will do all they can to ensure this decision does not compromise our policy or priorities on the delivery of further education.”

A project team is being established, and a range of actions are being considered. It is hoped ways can be found to protect the level of reserves held, and options such as the utilisation of charitable trusts for additional funds like reserves and donations are being looked at. John Henderson said Colleges Scotland members had received reassurance from Cabinet secretaries that the government wanted colleges to “play a full part in working to find solutions to mitigate the impact of this reclassification”. “Both government and we agree that will be essential to safeguard the student experience, and help to realise our joint ambition that colleges are able to fully contribute to supporting employers and growth in Scotland,” he said.

However, some in the sector are not as optimistic. The proposed mitigating solutions from the SFC and the Scottish government were “at best unproven”, a college principal said.

Whatever solutions can be found, the government remains clear on one thing: the reclassification decision would not “alter our case for reform, or for example the ability of the colleges to merge, or the rationale for those mergers,” Mr Russell stressed.

GRAVATT: ‘WE’RE KEEN TO MINIMISE THE DISRUPTION AND COSTS’

In England, legislative changes removing colleges from government control have meant the effects of a reclassification of colleges have been mitigated.

To counteract the loss of direct government scrutiny, an FE commissioner will be established later this year. He or she will be supported by eight FE advisers, responsible for the day-to-day liaison with colleges, and will be sent in if a college is classed inadequate by Ofsted inspectors, encounters financial difficulties or fails to meet targets.

Colleges could then be given “administered college status”, which would lose them considerable powers over staff and assets. The commissioner, who will report directly to ministers, could also call for the replacement of all or some of a college’s governing body, and ultimately for a failing college to be dissolved.

Sector representatives said these powers required further consideration, and also voiced concerns over the proposal that the commissioner would have a fortnight to complete his or her investigation. There is still, however, some relief that the consequences of reclassification were avoided. Association of Colleges’ assistant chief executive, Julian Gravatt (pictured above), said: “English colleges have had many successes in the past 20 years working in partnership with government but at arm’s-length.

“Colleges are resilient and will work with whatever financial controls departments impose on them but at a time when budgets are being cut, and student expectations are rising, we’re keen to minimise the disruption and costs that would follow the sort of technical accounting decision that is changing things in Scotland.”