Colleges in England are to be reclassified as public sector bodies, it has been confirmed, which comes with new controls on borrowing and senior staff pay.
Today’s decision concludes a six month “classification review” by the Office for National Statistics, the independent body which decides which sectors of the economy should be accounted for in the government’s accounts.
This affects further education colleges, sixth form college corporations and designated institutions in England and ends a decade of private sector status.
The ONS has said: “These further education institutions will be reclassified from the non-profit institutions serving households (NPISH) sector to the central government sector. This comes into effect, retrospectively, from 1 April 1993 for FECs and DIs, and from 1 April 2012 for SFCCs.”
It means the college sector’s debts of around £1.1 billion will now sit on the government’s balance sheet and could triggers the start of new controls on college finances, borrowing and governance.
Leaders from the Association of Colleges and Sixth Form Colleges Association have issued a series of demands on the government to reverse longstanding inequalities in funding.
It is now up to the Department for Education and the Treasury to make decisions on how to respond on issues like VAT, borrowing rules and senior staff pay. On VAT, the Association of Colleges believes over £200 million could be reclaimed by colleges if they are made exempt in the same way as schools and academies.
But this request has been denied, with the DfE saying: “The ability of colleges to recover VAT is not related to their ONS classification. Many public bodies cannot recover the VAT they incur.”
Some colleges leaders fear the change will result in a loss of autonomy and even greater red tape and regulation.
VAT rebate request denied
The AoC has also called for a guarantee of local government pensions, support for teacher recruitment, funded collective buying schemes and capital funding to compensate for borrowing restrictions.
And the Sixth Form Colleges Association have said they are “very disappointed” that the government hasn’t acted to “address the long standing and indefensible inequalities that exist between colleges and other providers of 16-19 education.”
The government has said it will consult on a new financial handbook for colleges to be effective from August 2024, signalling a two year transition period to the Treasury’s managing public money framework.
In the meantime, there will be a new “consent process” for new borrowing placed on colleges and DfE expect any overdrafts and revolving credit facilities to be phased out by August 2024.
Reclassification also means colleges are now in scope for government senior pay controls for new appointments from May 2023. This includes government approval for salaries over £150,000 and bonuses over £17,500.
Extra funding worth £150 million will be provided to colleges in spring 2023 through the DfE’s FE capital transformation programme to make up for the inability of colleges to borrow commercially.
And £300 million will be spent on college cashflow this financial year to “smooth out” payments to colleges by March 2023, though this will mean lower monthly payments between April and July 2023, “which is then available to each college between January and March the following year.”
Sector leaders had feared that a move to the public sector could result in a raid on reserves, but FE Week understands that colleges will be allowed to retain their reserves and continue to operate subsidiaries. This has been confirmed today, though subsidiaries are also automatically reclassified.
David Hughes, chief executive of the Association of Colleges, has said today that colleges’ new public sector status could “risk making colleges less fleet of foot in meeting the needs of their students, employers and communities.”
In a statement, Hughes said officials have developed new rules which leaves colleges “in control of their budgets, reserves and capital projects … It is helpful that DfE will be distributing the remaining funds from the three-year capital budget via a formula in the spring and also bringing forward revenue payments to March 2023 but we need to see whether these fully compensate for the new borrowing restrictions.”
Bill Watkin, chief executive of the Sixth Form Colleges Association, said: “The imposition of VAT on sixth form colleges will continue to act as a tax on learning that redirects funding away from the frontline education of students. There is very little in today’s response that will benefit students, but a great deal that will tie up college staff in bureaucracy and red tape.
“Today’s announcement will encourage more sixth form colleges to consider the academy option and it is more important than ever to remove some of the longstanding barriers to conversion.”
Colleges in Scotland and Northern Ireland are already part of the public sector. Colleges in Wales remain in the private sector.
Universities are currently recorded in the private sector, though the ONS have confirmed today they intend to conduct a classification review on universities to report this time next year.
New intervention powers swung the balance
The classification review was triggered by the Skills and Post 16 Education Act 2022 passing in to law, according to the ONS.
In their decision, the statistics body said the new legislation gives the secretary of state for education greater powers to intervene in the governance of a college in “instances of mismanagement”.
“The presence of this intervention power indicates that the secretary of state has the legislative powers to appoint and/or remove members of the relevant institution’s governing body.”
As well as cases of mismanagement, new powers in the Act which give the education secretary powers to direct colleges to college governing bodies to better meet local skills needs, including by ordering mergers, was also a factor in ONS’ decision to reclassify.