The briefing document - obtained by The Age - shows state government operating contributions for the sector plunged by $119 million, or 159 per cent, in 2013. Capital funding for buildings and equipment fell by $14 million, or 36 per cent. The hit was only partly offset by higher student charges, with fee revenue up by $32 million or 9 per cent. But the report showed the financial health of the sector had deteriorated dramatically. It said underlying profits dropped by 121 per cent, with the sector reporting an overall loss of $12 million. Recently retired Holmesglen TAFE chief executive Bruce Mackenzie said the training system was ''badly underfunded''. He said the Victorian government was the ''meanest in Australia'' in terms of funding the state's public TAFEs, and predicted extensive mergers, particularly in regional Victoria.

''It's just a recipe for a bad economic outcome for Victoria,'' Mr Mackenzie said. The leaked report follows a 2012 decision by the state government to slash TAFE funding by $300 million to help maintain a budget surplus. After taking over as Premier last year, Denis Napthine announced $200 million over four years for ''innovation and structural reform''. But some critics have said this money will be spent on TAFE mergers. Concerns about the potential impact of the cuts were echoed in annual reports released last week. Holmesglen chief executive Mary Faraone revealed the institute had posted a deficit for only the second time in 30 years, blaming lower training subsidy rates and the loss of annual funding as a public provider. Kangan's annual report shows the institute was able to produce a profit only after slashing average teaching costs by 21.9 per cent in 2013 after a 22 per cent cut in average government funding over the year.

''As funding per teaching hour from the state government has been reducing sharply since 2012, this is a necessary strategy to counter dramatic student fee hikes,'' the institute said. ''Observations have shown that potential students who are currently unemployed have difficulty affording the higher tuition fees.'' Industry sources said Bendigo TAFE and Gippsland-based Advance Tafe are in particularly serious trouble. Opposition higher education spokesman Steve Herbert said the sector was in crisis at a time of high youth and regional unemployment. ''Communities right across Victoria have a deep interest in the local TAFE providing skills for jobs and yet it takes a leaked report for the public to see the damage inflicted by funding cuts,'' Mr Herbert said.

The leaked report follows a press release issued by the Minister for Higher Education and Skills, Nick Wakeling, last week trumpeting the success of the sector. ''Victoria's TAFE sector is in the middle of an exciting transformation to help ensure it continues to deliver high-quality training that leads to better outcomes for students, employers and industry,'' he said. A state government spokeswoman said annual reports tabled in Parliament last week showed TAFEs were at ''different stages of transforming their businesses to compete and grow student enrolments''. ''The minister has not seen the draft document and is not in a position to verify its contents and would not pre-suppose any findings the Auditor-General might or might not make,'' she said. Loading

The government's $200 million TAFE structural adjustment fund would help institutes ''modernise, innovate and strengthen'' their operations, she said. ''Announcements on funding will be made in the near future.''