Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, June 29, 2017

Official Report 619KB pdf

---

“Scotland’s colleges 2017”

Agenda item 4 is on “Scotland’s colleges 2017”. We will take evidence on that report from the Auditor General, whom I welcome back. I also welcome her two colleagues from Audit Scotland. I invite the Auditor General to give an opening statement.

Thank you, convener.

The second report that I will speak to is my annual report on Scotland’s colleges.

Colleges have an important role in helping to achieve sustainable economic growth by contributing to the development of a highly educated and skilled workforce. The college sector has been through major reform in recent years, and I have reported to the committee and its predecessor committee on the sector’s progress through my annual overview reports. “Scotland’s colleges 2017” provides an update on college finances as well as an analysis of learning activity.

Since 2012-13, the Scottish Government has set a national target for the college sector to deliver a specific volume of learning. The sector has continued to exceed that target, although its performance declined slightly in the past year. The Scottish Government prioritises full-time courses for younger learners. With the number of young people in Scotland falling and school leavers increasingly going into employment or university, we think that it will be harder for the sector to continue to achieve the national target in the future. We illustrate that in exhibit 1, which is on page 9 of the report.

There were more than 220,000 students in colleges in Scotland in 2015-16. The number of students attending college has fallen slightly since last year. If we measure by full-time equivalents, numbers are at their lowest level since 2006-07. Most of the reductions are in the 16 to 24-year-old age group. The changes in student numbers are shown in exhibits 2 and 3 on pages 10 and 11 of the report. Because overall demand for college places is still not recorded, we are not able to say whether that reflects a fall in demand or other factors.

If we look at how well students do in college, we see that attainment continues to improve. The percentage of full-time students who successfully completed their courses increased in 2015-16. Most full-time students also continue to be satisfied with their college experience.

We note that the financial health of the college sector remains stable, although it has deteriorated since 2014-15—we analysed college accounts and found that 11 colleges had underlying deficits, compared with nine in the previous year. Overall, the sector’s underlying deficit was £8 million in 2015-16 compared with £1 million in the previous year.

Colleges will receive an increase in funding from the Scottish Government in 2017-18, but they will still face financial challenges. In particular, Colleges Scotland has estimated that meeting the costs that will arise from implementing agreements from national pay and conditions negotiations could amount to about £80 million over three years. The Government is still working to verify those figures.

Some colleges have started to develop longer-term financial plans, and work is under way with the Scottish Higher and Further Education Funding Council to establish a common set of assumptions to underpin them. That will help to support financial decision making that takes account of immediate and future cost pressures.

The report makes a number of recommendations for the Scottish Government, the funding council and individual colleges to take forward. Those recommendations are summarised on page 6 of the report.

I am joined by Mark MacPherson and Stuart Nugent, who carried out the work for the audit. We are happy to answer any questions that the committee may have.

Thank you, Auditor General.

Mention is made of five colleges that had deficits. Some of them have already come before the committee but there are some new names in the report. Should we be concerned?

We talk about four colleges that are facing particular challenges to their financial sustainability; three of them are the ones on which you received section 22 reports in this year. The other is New College Lanarkshire, which is summarised in exhibit 8 of the report. At the point when section 22 reports were being drawn together, I made the decision that it was not appropriate at that stage to bring you a section 22 report on that one college, but we are monitoring it closely, so you might see further reporting in the future, depending on what has happened during the financial year that is about to close.

On re-reading, I am talking about Dumfries and Galloway College, which also failed to meet its targets.

Can you refer me to the paragraph you are talking about, Mr Beattie?

It is paragraph 8.

I apologise. You are talking about the targets for student numbers rather than the targets for financial performance.

We do not have particular concerns about what is happening in the areas that have not been individually reported to the committee already, but the assurance holds that through the auditors and through the work that the Audit Scotland team does, we monitor closely and, if we think that there are underlying problems that are not being addressed, we will report them to the committee in good time.

I note that you refer to a 6 per cent increase in staff numbers during the past couple of years. That seems a little bit extraordinary, given that all the colleges are saying that they will be saving money and reaching their budgets by reducing staff, which are the most expensive element. Are they front-line staff? It just seems odd.

That caught our attention too, as you can imagine. More information is set out in paragraphs 42 and 43 about non-teaching staff and teaching staff. The number of non-teaching staff has increased by 9 per cent since 2013-14, and colleges in which that has happened have told us that the main reasons were services such as catering and cleaning being brought back in-house; curriculum changes, which require more support staff; and apprentices being brought on as members of non-teaching college staff.

The number of teaching staff increased by 5 per cent since 2013-14—that is shown in paragraph 43. Again, colleges tell us that that is due to increasing credit targets in some colleges, and to changes in curriculum or service delivery. You heard some of that in the evidence from Edinburgh College. It is obviously an area that we are looking at closely, given the reduction in staff numbers that we saw during the peak period of reform, and we have recommended that colleges should be putting in place detailed workforce plans so that they are able to plan for the longer term rather than making short-term decisions that might have longer-term costs and consequences.

Reference is made to a reduction in the amount of money that is held in arm’s-length foundations. I assumed that that is what you would have expected because most of that money was originally allocated for capital expenditure projects. Did you look at that? I know that there is a question about the extent to which you can examine an ALF.

As you know, we look at them through the lens of the college accounts rather than looking directly at the ALFs themselves. Stuart Nugent can talk about what we have seen in doing that work.

We reported our findings in paragraph 60. We noted that in 2014, £99 million was donated to ALFs from the college sector. The amount that is held is around £57 million and colleges are forecasting that they will require a further £34 million from ALFs, mainly for capital projects in the year from 2016-17 to 2018-19.

The background is that, given the range of pressures that colleges face, it is unlikely that they will be able to transfer significant amounts back to the foundations, but that might change over time. We expect to see that reflected in the longer-term financial plans, as they are developed.

Is there any indication that colleges are removing the funds from the ALFs for revenue purposes?

The terms of the ALFs should preclude that, and the examples that we looked at and refer to in paragraph 60 were generally removals for capital purposes.

On page 6 of the report, you say that

“The SFC should conclude its work to: ... require each college to include ... the underlying financial position”.

Is that with respect to depreciation?

Stuart Nugent is our expert on all the accounting adjustments that are made. I ask him to talk you through the significant elements, of which depreciation is one.

Yes, depreciation is one of them. Others are pension adjustments, which reflect longer-term implications from pension liabilities for the college sector. There are also adjustments for any asset impairments, which do not result in an immediate cash payment but may have an impact in the longer term.

This year, we have also noted that, due to a change in the accounting rules, capital income from ALFs has been recognised in full in-year whereas, in the past, it would be recognised over the course of the asset that it was funded for. We have made an adjustment for that, because otherwise the income would not match the expenditure.

Those are the main adjustments that we made this year. We recommend that the Scottish funding council identify the main adjustments along the same lines as us and require colleges to include within their accounts a statement of the underlying position.

Is this the first time that that has been done?

No. We did a similar exercise last year, the only difference being that the capital income from ALFs is a new adjustment brought about by the statement of recommended practice that was introduced in 2015-16.

Has the SFC accepted that recommendation?

Yes, it has. In fact, we recommend in the report:

“The SFC should conclude its work to specify the adjustments”.

The SFC has taken the point on board and, as far as I am aware, the statement will be included within the accounts direction for 2016-17. I have not had sight of that yet, but it should be available shortly.

Let us return to the question of depreciation, which has always been a bit of an oddity. In your calculations in the report, you have allowed for depreciation in the college sector. I understand that there is going to be a change to that. Will that eliminate the need for those adjustments?

No. We have not seen the detail of how it will look in the accounts, but I do not think that it will eliminate the need for an adjustment as such. The funding council proposes to allocate a fixed cash budget to each of the colleges. There is a name change from “net depreciation” to “fixed cash budget”, but it is, in effect, the same thing. Each college will know in advance how much fixed cash it will have available and what it can spend that cash on. That should provide colleges with more certainty, although spending that cash will still have an impact on the surplus or deficit position in the accounts, so it will still require an adjustment of some sort within the accounts.

Okay, so eliminating the depreciation and bringing in that fixed cash budget is not really achieving much, is it? At the end of the day, it is coming to the same thing.

It is maintaining the funding that is available to colleges through the changes that were required when they were reclassified as public bodies. The matter is complex, as you can hear from the very detailed information that Stuart Nugent has been providing to the committee. The general conclusion is that there is no solution to the underlying issue that has been brought about by reclassification. We are focusing instead on transparency and on making sure that colleges report consistently how they have spent the resources that are available to them, so that we can look at the underlying financial position as a result of that.

Thank you. We will move on to Monica Lennon’s questions. I am conscious of the time.

One of the headlines from the report is that student numbers decreased slightly in 2015-16 and are at their lowest since 2006-7. There has been a lot of reaction to the report and the figures. Can you provide some clarification? When the report was raised at First Minister’s question time last week, the First Minister did not accept the methodology that has been used in it. She said:

“Those are the Scottish Further and Higher Education Funding Council statistics. We do not agree with the methodology.” —[Official Report, 22 June 2017; c 14.]

Can you explain what is going on?

11:00  

Of course. We agree the factual accuracy of our reports with the bodies that we are auditing. In this case, that included the funding council and the Scottish Government.

My report focuses on the 20 incorporated colleges, which are the ones that fall within my remit. That has been the case since I started producing such reports some years ago. Paragraph 12 provides some background to the confusion that you just highlighted. The figures that I quote in my key messages and throughout the report are based on those 20 incorporated colleges. If we include the figures for the non-incorporated colleges, of which there are six, plus Scotland’s Rural College, which is a higher education institution whose activity counts towards the further education target, we end up with a small increase in headcount in 2015-16, but the overall trend is still the same over time.

We have tried to be as transparent as we can be about what is happening. Exhibits 1 and 2 highlight the overall message, which is not so much about student numbers in 2015-16 as about the long-term trend. That relates to the focus on younger students studying full-time courses that lead to a recognised qualification, which is a matter of Government policy, and the declining number of young people in that age group as more of them go into employment and higher education rather than into further education college.

The figures that I have reported are transparent and I stand by them, but that is not the key message. The message is about the longer-term policy and the extent to which targets will be achievable given the demographic shift that we are seeing.

That is a helpful clarification. What the trends are telling us takes me on to consideration of demand. Your report includes a lot of discussion about the fact that we do not really know what the demand is. Last year, you recommended that the funding council explore with colleges a better way to assess demand. I think that you say that the Scottish Government is now commencing some work on that. Might that be a common application process like the Universities and Colleges Admissions Service system that we have for universities? Is that what you are recommending and what the Government is committed to exploring?

Yes. You are right to refer to the higher education system. We know how many students across the United Kingdom are applying for higher education places but we do not have that information for further education overall or in Scotland. Therefore, it is not clear whether the falling numbers over time reflect a fall in demand or students being unable to access the courses that they would like to study. Mark MacPherson can say more about what the Government and the funding council are doing about a system to fill that gap in the data.

The funding council and the Government have, in the past, considered ways in which they can better understand the demand for college places. The SFC has a demographic model that considers some of the wider implications of demographic change. However, I understand that, as part of the learner journey work that the Scottish Government is undertaking, it is considering the potential for a common application process. That is still at an early stage.

Retention rates decreased slightly for 2015-16, and work is under way to understand the reasons why people drop out—Annette Bruton ran through some of them. Are we getting a complete picture of what is going on?

The information that we have used is set out in paragraph 25. We have information that splits between full-time and part-time further education students and higher education students in further education colleges, which is part of the complexity about which we were talking a moment ago. It is a mixed picture, and the changes are small year on year.

At a national level, it is hard to explain what is happening. As we say in paragraph 25, the funding council thinks that one of the reasons for the decrease may be the efforts that colleges are making to target harder-to-reach students, who may need more support to remain in their courses and benefit from them. However, that is an impressionistic view rather than one that is based on the data.

I was encouraged to hear what Annette Bruton said about the work that Edinburgh College is doing to identify early those students who are having difficulties and to determine what can be done to support them. That links to questions that need to be asked about the availability of student support funding and other services to help students who have particular needs to benefit from their courses. That can be done only college by college.

I know, from speaking to students and lecturers recently, that it is not always a negative when a student drops out of a course. It could be that they have managed to get a place at university or that another opportunity has arisen. The point is that we do not know what the picture is telling us.

My other question is about the financial cost when a student withdraws from a course early. Has any work been done to find out what that costs the public and whether we could improve the situation?

It is not work that we have done. We note in the report, however, that, in March this year, the Minister for Further Education, Higher Education and Science outlined some work that the Government is doing to improve attainment and retention rates in colleges. I hope that that work will address such questions so that we can really understand the costs and benefits to individual students, as well as to colleges and the sector as a whole, and think about how best to improve the situation.

Lastly, I would like to pick up the issue of national bargaining, which was discussed earlier. Colleges Scotland estimates that around £80 million will be required to cover the full cost of implementing national pay and conditions. It sounds as though that has come as a bit of a surprise to some colleges and they have not factored it in. I note, from the point that Colin Beattie made—I think that you also touched on it—about New College Lanarkshire, that that seems to have been a factor in some of the financial pressures that it is facing and has flagged up.

Do you have any sense of how prepared colleges are to meet those costs? Is the figure of £80 million accurate? The Scottish funding council has made additional money available in recent weeks, but it is only around £2 million. If £80 million is the correct figure, where is that money going to come from? Can colleges absorb that cost within their current budgets?

We highlight that as being one of the most significant financial pressures that colleges face. The figure of £80 million is only an estimate at this stage.

One of the difficulties is that the implementation of national pay and conditions will affect different colleges in different ways. Because they have all negotiated their pay and conditions separately, they are starting from different places. Some are closer to what the national package looks like and some are further away. Building up an understanding of the financial implications will need to be done almost on the basis of individual members of staff.

Mark MacPherson can say more about the work that is going on behind the scenes to understand the scale of the challenge.

I understand that Colleges Scotland, the representative body for colleges, has been working closely with colleges to establish the individual costs at each college based on their best understanding of what the final costs are likely to be. It is subject to on-going discussion, as you would expect, with both the Scottish funding council and the Scottish Government, because there will be a question about where the funding to meet that cost might come from if it is needed.

Is the figure of £80 million that Colleges Scotland has produced based on the information that it is getting from the individual colleges?

I understand that, since the time of that estimate, Colleges Scotland has been doing further work with colleges and the figure has been refined over time. We do not have the detail on what the figure currently is.

Can you remind us, Auditor General, how much the college sector currently has in cash assets?

The amount of cash that colleges held at the end of the financial year fell by £11 million between 2014-15 and 2015-16. Stuart Nugent can help you with the amount that is currently held.

Colleges held £43 million in the 2015-16 accounts.

That is their cash. At the moment are there any restrictions on the use of that money? Does it have identified purposes?

No, that is cash in hand. It is to meet the on-going costs of running the services that the colleges are responsible for.

Thanks very much for clarifying that.

I want to ask about population changes. Paragraph 7 of your report states that, since 2012-13, the Scottish Government has maintained a level of 116,000 FTE student places despite quite a significant drop in the actual population during that period, particularly in the 16 to 19-year-old age group. You also report that more youngsters are going into work and/or to university. That is a very positive message, but how are the colleges looking at the situation? There will be a clear message if, in future years, there is still a declining population. How will colleges prepare for the years to come on the assumption that that FTE target will be maintained?

You are right. The first of my key messages is that the colleges have managed to continue to achieve their learning targets over a number of years in the face of those challenges. Exhibit 1 shows you the learning targets achieved in the past and forecast for the next couple of years against the population of young people, and the gap starts to look more significant as we look to the future. That is why we are recommending, first of all, that the target itself should be reviewed. Given that there are fewer young people and more of them are going into work or into higher education, is the target still appropriate? Individual colleges, through the reform process and through the curriculum reviews that they are carrying out, are looking at how best they can serve the needs of the young people in their areas. In a sense, though, you need both the top-down and bottom-up perspectives to be able to make an assessment of whether the system is trying to do the right things for the longer term.

How are colleges managing to maintain the targets if the physical numbers in the population are declining and that is having an impact on the number of people in colleges?

Mark MacPherson may want to comment on that. We have seen curriculum reviews take place after reform, which is aimed at understanding better the needs of employers and young people and ensuring that those courses are being delivered. Colleges are looking at more innovative ways of providing further education and more options for learning—more work is going on behind that—and achieving the targets is clearly becoming more difficult against the demographic change and the financial pressures that we reported on.

We mentioned the lack of any national measure of demand. Some of the continued achievement of targets could have resulted from colleges tapping into sectors of the population that previously were not attending college. We have also mentioned harder-to-reach students, and it could be that, with additional support or input for those students, more people could be attracted into college from the smaller pool that now exists.

Is there time for one last question?

Very briefly.

It is on Europe again. In paragraph 54, you mention a number of schemes that are funded through the European Union to the value of £70 million, but those programmes are scheduled to end anyway in 2021. Has there been any discussion about extending those programmes beyond that time? The UK Government has given some kind of commitment up to 2020, but I do not think that there is any commitment to go beyond that. Do we know any more?

I do not think that we can say more than we say in the report, where we recognise that as one of the potential financial pressures facing colleges if that funding is not available after 2020.

Those are programmes for youth employment and developing the workforce, so I presume that the colleges would wish to continue with those initiatives beyond that date.

I assume so, and I assume that the Government would. Nevertheless, given the vote last June and the events that have unfolded since then, we will need to review what happens if that European funding is not available and explore how the objectives that it is achieving could be met in other ways.

I want to explore two things. The first involves the SFC. I have been looking at some of the other reports that we have done and at the evidence on Edinburgh College that we looked at earlier. The SFC removed credits from the college, which plunged it into debt although it clawed back £800,000 on additionality, and it is funding a voluntary severance scheme. Last week, we looked at Moray College, which is having financial challenges, and at Lews Castle College, which has an allocation of credits that is causing a problem and which does not get clawback. What is your view on how the SFC is managing the sector—and, indeed, managing the public purse?

As I said in my opening remarks, we have reported on the progress of college reform over the past three or four years. A couple of the clear messages coming out of that work have been, first, that the range of reforms that have been happening over the period has been unprecedentedly complex, and secondly, that the governance arrangements that have emerged from the end of it are now very complex, with single college regional boards, college regions that are funding colleges in other parts of Scotland and—as you heard last week—a different set of arrangements for the University of the Highlands and Islands, with seven colleges playing into UHI’s overall objectives.

We have highlighted some of the changes that the funding council has tried to make in response to the reform and the complexity that comes with it, and we have reported on some of the cases in which that has not worked as well as it should have done—particularly in relation to the college in Lanarkshire that the committee spent some time on two years ago. If you want to explore the future role of the funding council on the back of all the change that has been under way over that period, it would be appropriate to ask the funding council about it. I have not drawn a conclusion about it other than to recognise the complexity and the areas where it has not gone as well as it might have done.

11:15  

Thank you. That is very helpful. I also want to explore staffing and staff costs, which Colin Beattie talked about. We have looked at an awful lot of voluntary severance schemes. You say at exhibit 10 that £18 million of costs are related to staff severance. In the same period, staff costs have gone up by £24 million, which begs the question—what is going on with the workforce planning? Are we removing too many people through the voluntary severance schemes? What is happening to those people who have left through voluntary severance? Are they coming back into the sector?

There is an awful lot to answer there. I will start by correcting the understanding of exhibit 10. In relation to “Exceptional staff costs”, the figure of £18 million that you cite is the difference between what was incurred in 2012-13 and what was incurred in 2015-16.

Forgive me, Auditor General, but paragraph 40 says:

“£18 million of which related to staff severance”.

You are absolutely right—I apologise for misunderstanding the question, in that case.

Over the past two or three years, we have said that, given the scale of the reform that has been going on and the range of college mergers that we have had, it is entirely understandable that voluntary severance schemes have been needed to reshape the workforce for new curriculums and to take out things that were duplicated in teaching and support for teaching and learning. However, we have also said that doing that in the absence of curriculum reviews and long-term workforce plans runs the risk of exactly what you describe—the wrong people being let go because they have other options and people who may not be best matched with the college’s future plans remaining.

We have reported the figures because we have seen that uptick in numbers of both teaching and non-teaching staff, and we will continue to look at the voluntary severance schemes that are in place through our audit work. We were particularly pleased to see the emphasis on workforce planning coming through in individual colleges with support from the funding council. That will ensure that, in the future, a much longer-term view is taken of what staffing is needed and how it can be afforded against the backdrop of the financial pressures that we have described.

Thank you.

Thank you for your evidence this morning. We will now move into private session.

11:17 Meeting continued in private until 11:29.