The financial pressure on colleges in Scotland is increasing as the gap between income and expenditure widens, Audit Scotland has said.

In its annual report on the state of the college sector, published today, Audit Scotland said it had reported a “small, but improved, underlying financial surplus in 2017-18”.

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Background: Almost half of Scotland’s colleges ‘very good’ for student outcomes

‘Financial challenges’ for colleges

However, the report adds colleges were operating within an increasingly tight financial environment and the sector-wide position “masks particular financial challenges for some colleges”.

“The gap between colleges’ income and expenditure is widening and this is forecast to continue, with 12 incorporated colleges forecasting recurring financial deficits by 2022-23,” it states.

According to Audit Scotland, colleges face increasing cost pressures, and the increase in Scottish government revenue funding for 2019-20 covers only the additional costs of harmonising pay and conditions across the sector - excluding cost-of-living increases and increases in employers’ pension contributions.

National bargaining

The return of national bargaining to the Scottish college sector and the subsequent move towards a harmonisation of pay and conditions, which will lead to lecturers being moved onto a pay scale towards salaries of over £40,000, has significantly increased staff costs for colleges - something sector leaders say will increase the pressure on institutions.

According to today’s report by Audit Scotland, current Scottish government capital funding also falls short of the estimated costs of maintaining the college estate. “The proportion of non-government income that colleges generate has reduced over time, and cash balances and money held by arm’s-length foundations fell,” it says.

However, student numbers increased, and the sector exceeded its learning activity targets, said Audit Scotland. “Over the past three years, colleges have been providing less learning to students aged 16-24 and more to students aged 25 and over. Colleges are widening access to disabled, ethnic minority and care-experienced students. After several years of increasing learning delivered to students from deprived areas, the proportion of learning delivered to this group fell slightly in 2017-18.”

Attainment and retention

There is considerable variation across colleges in terms of student attainment and retention and those going on to positive destinations. Average attainment rates for students in full-time education have remained relatively static in recent years, with the rate for full-time further education, at 66 per cent, “some distance” from the Scottish Funding Council’s (SFC) target of 75 per cent by 2020-21. Attainment gaps continue to exist for students from the most deprived areas, students with disabilities and for care-experienced students.

Audit Scotland says there is “scope for the SFC to work with individual colleges and their boards to improve financial planning and to achieve greater transparency in the sector’s financial position”. It adds the SFC can also be more transparent in how it reports colleges’ performance against outcome agreements and student satisfaction data: “The SFC has agreed aspirational and stretching targets with colleges in their latest outcome agreements. Based on recent performance trends, achieving some of these targets will be very challenging for colleges”.

Scottish Funding Council chief executive Karen Watt said it was “encouraging to see” that in a tight financial environment, colleges were “performing well, exceeding their learning activity targets and adapting to changing economic and demographic trends”. “Funding will, however, continue to be challenging and we will therefore support colleges in their financial planning and work with Scottish government to identify appropriate funding models for future capital investment,” she added.

Students hit hardest

NUS Scotland president Liam McCabe said: “We remain concerned that Scotland’s colleges continue to be underfunded - a decision that will continue to hit Scotland’s students the hardest. The most recent Scottish government budget saw funding for the day-to-day running costs of Scotland’s colleges cut, and now Audit Scotland has reported the growing financial challenges facing Scotland’s colleges.

“Our colleges play a vital role in delivering Scottish government priorities: supporting students from the poorest backgrounds into university, equipping learners with the skills employers are demanding, and much more. If the government is serious about education being their number one priority, they must put their money where their mouth is.

“In order to build a world-class education system, with the best teaching, resources and facilities, the Scottish government must step up and fully fund the sector. College students deserve nothing less.”

‘Significant challenges’

A spokesman for the EIS teaching union, which represents college lecturers, said: “While we note that the underlying financial position of the college sector has improved slightly, the report highlights the significant challenges that exist for individual colleges moving forward.”

“We note with concern that the proposals to address these financial issues appear to focus on staff reductions and the operation of voluntary severance schemes. This is particularly concerning when consideration is given to the funds currently held in arms-length foundations (£38 million). This funding could be more appropriately invested in the college sector.

“The report also highlights the fact that capital funding is insufficient to address colleges’ maintenance requirements and explores the risks associated with this. It is clear that further investment is needed to ensure that the colleges of the future are fit for the needs of staff and students alike.”

Staff ballot

Shona Struthers, chief executive of Colleges Scotland, said: “The Scottish government is increasing revenue investment in colleges, which we welcome, but this additional funding is being used to cover the growing costs from harmonising pay, terms and conditions across the sector. EIS-FELA members currently being balloted on whether to accept the deal being offered by colleges should recognise that all that additional money is coming from colleges making cuts elsewhere.”

She added: “It is also clear from this report that colleges’ ability to generate alternative funding, such as through commercial income, remains limited, therefore, the sector would welcome greater flexibility to help in this area.”

Recommendations for the sector

• Audit Scotland says colleges should agree their underlying financial position with the SFC prior to finalising their accounts.
• They should also improve data collection and response rates for student satisfaction and publish results.
• Institutions should use How good is our college? effectively to drive improved performance and enhance the quality of service provision.
• Meanwhile, college boards and regional bodies should agree medium-term financial plans that “set out the mitigating actions to ensure their college’s financial sustainability”.
• They should also submit agreed medium-term financial plans to the SFC along with financial forecast returns (FFRs).
• The SFC should work with colleges to agree their underlying financial position prior to finalising their accounts.
• It should also require colleges to submit medium-term financial plans to support FFRs in assessing financial sustainability across the sector.
• The funding body should publish college region performance against all outcome agreement measures.
• It should also publish good-quality student satisfaction data for every college.
• The SFC and Scottish government should agree and publish a medium-term capital investment strategy that sets out sector-wide priorities.
• They should also review whether targets for college provision and student outcomes, including for students from deprived areas, remain relevant and realistic, based on current performance trends
• The SFC and the government should work with colleges to deliver the necessary improvements in performance to meet agreed outcome agreement targets.