Mind the Sustainability Gap: a short guide to university finances

Be warned: this blog-post consists simply of passages from HEFCE’s Financial health of the higher education sector: financial results and TRAC outcomes 2013-14, accompanied by the commentary of your averagely financially-literate English professor. The principle being: I’ve read it, so you don’t have to; or, I’ve got nothing better to do on a Saturday night, so you can get out more.

On our addiction to international students

One of the sector’s most significant risks is that overseas recruitment will be lower than projected in the sector’s financial forecasts, particularly as reliance on this source of income continues to grow. While dependence on overseas fee income varies between institutions…the latest financial results show that the number of institutions reporting a greater reliance on this source of income grew again in 2013-14.[para. 31]

Or: the surpluses from international fees help to underwrite other activity. See below re the sustainability gap.

On staff pay

While the sector reported an overall increase in staff costs in 2013-14, the rise in staff numbers (up 3.7 per cent compared with 2012-13) caused average staff costs per employee to fall by 0.3 per cent (real terms). [para. 35]

Or: staff pay is not (yet) causing problems. Or: pay rises are happening but they’re quite selective, so pay for many is actually falling in real terms.

On capital expenditure

Buildings and related infrastructure represent the ‘public face’ of a university, and help it to attract and recruit new students, as well as having a direct impact on the student experience. With rising student expectations (resulting from higher fees) and increasing competition in the home and international markets, the sector needs to increase investment in infrastructure.

……

In an era where capital funding from Government is high there is less need for institutions to generate cash to re-invest in their infrastructure. The more government funding for capital reduces, the more institutions need to generate themselves, either through increased surpluses or by levering additional funding from other sources, including borrowing…This places greater pressure on HEIs to generate higher surpluses to provide the positive cash flow needed to fund investment and meet finance costs.

……

Although the sector has invested significantly in infrastructure over recent years, data…indicates that on 31 July 2013 many institutions still had large amounts of non-residential space in poor condition, with an associated cost to upgrade the estate of £3,327 million…However, this only reflects the cost required to upgrade this portion of the estate to a sound and operationally safe condition, and does not take into account the additional investment needed to bring the estate up to the standard required to satisfy rising student expectations. [paras. 45, 47, 50]

Or: all the ambitious building projects are putting strains on finances, but we seem to be stuck in an inflationary spiral of expectation and competition. The more we build, the more the students want; the more they want, the more we build.

Borrowing

As important as the absolute level of borrowing is the ability of the borrower to service the cost of borrowing. In 2013-14, the sector reported interest payments of £359 million…The cost of increased borrowing has to date largely been mitigated by the exceptionally low interest rates. However, a rise in interest rates could add significant costs to the sector, placing increasing financial burden on individual institutions’ sustainability. [para. 54]

Or: is your university sensibly locked into long-term interest rates? There might be an economic recovery one day. Really.

The sustainability gap

TRAC data from HEFCE-funded HEIs for 2013-14 indicates that the sector reported a sustainability gap (the difference between the level of surplus achieved by the sector and the level required to cover the full economic costs of its activities) of £883 million, a deterioration against the position in 2012-13, when the sustainability gap was £870 million.

 ……

These figures show a pattern which has been broadly constant for some years, the main features being that:

  •  publicly funded teaching shows a position just slightly above break-even (compared with break-even in previous years)
  •  non-publicly funded teaching makes a significant surplus
  •  research is significantly in deficit.

When comparing income with costs, the TRAC data for 2013-14 shows that the sector recovered 96.6 per cent of the full costs across all of its activities; a marginal increase from the recovery rate reported in 2012-13, which was 96.5 per cent. However, the TRAC results for 2013-14 show that the sector’s research activities continue to report a significant deficit across all sponsor categories, with the deficit for research activities totalling £2,412 million (equivalent to a deficit of 35.5 per cent when compared with research income). [paras. 61, 64-5]

Actually this is pretty clear, though a breakdown between STEM and HASS research would be helpful. The serious funding challenges are in the latter. Big science is a hungry beast; and, paradoxically, the universities with the biggest grant income figures may consequently face the biggest challenges.

Overall, the data shows that surpluses on non-publicly funded teaching and other activities are insufficient to support the shortfall on research, and the increasing sustainability gap for 2013-14 reflects the fact that the sector is not generating enough income to finance all of its activities and investment. On a single-year basis this might not matter, but over the medium term this means that in the absence of some other source of income that can be used at their discretion, some institutions are likely to face difficult decisions about their capacity to invest in and sustain their current portfolio of activities. [para. 67]

Or: research intensive universities are playing a tricky game. They’re losing money on what brings them their greatest prestige. Since Lord Browne’s promise of differential fees never materialized, they’re getting no more income per student than other universities from home and EU students. Hence the precarious dependence on international students. And hence, by the way, the absurdity of the current visa rules, which do so much to deter international students.

Conclusion

Got all that? Now let’s see if the Tories shake it all up again.

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