The shape of the financial crisis to come?

The outlook for higher education, and for those who have dedicated their lives to it, is as bleak as it has been in a generation. David Kernohan sets out what to expect.

It is clear that – if government support fails to materialise – staff in every part of our higher education system will be at risk of losing their jobs.

A sharp decrease in income compared to what would be expected in a normal year is, as we have set out several times on the site and has been argued elsewhere, almost inevitable for every higher education provider in the UK. The primary reason for this decrease will be fewer tuition fee-paying home and international students, though there will be a range of other factors such as lower occupation levels in accommodation, a drop in research income, and less use of campus services.

Planners, finance teams, and senior leaders will already be looking at their options. No provider wants to put staff out of a job – though as staff costs are a huge part of annual provider spending it is very difficult to avoid this kind of cut when a financial crisis of this expected magnitude hits.

The shape of a crisis

We’ve hinted at a timeline here before, but it is worth going over again for clarity. Towards the end of August, it will become clear how many fee-paying students have been recruited at undergraduate and postgraduate level, from the UK and further afield.

We will have some idea as to what government advice will permit students to do in terms of travelling to, living at, and learning at university. It is likely these rules will mean providers need to put in place physical and temporal mitigation – keeping students apart using timetables, space, and barriers.

By the start of term, as students turn up (or not) we’ll know a bit more about the pattern of potential shifts in demand and whether the fear in some parts of the sector that some institutions will be able to recruit voraciously at the expense of others have been realised.

For students borrowing from the Student Loans Company (SLC), tuition fee income will arrive in university coffers as usual in mid-October – equivalent to 25 per cent of all fees for the year. It has been announced that the January 2021 payment (a further 25 per cent) will also arrive in October. Maintenance loans will turn up in student bank accounts at a similar time, and in a regular year would primarily be spent on accommodation – some of it owned by the university.

At this point, providers are cash-rich. In most cases, in October 2020 they will have more money at this point of the year than at the same point any other year, even if student numbers are down. Some of this extra cash will be used to pay for the physical changes to the campus required for social distancing, some will be used to support the costs associated with online learning and additional student support that have characterised the spring and summer of 2020 and will extend to the next academic year.

A bleak winter

The crunch will come in February 2021. The SLC payment that would usually come at that time already arrived in October. With increased costs related to delivery as we ease lockdown, both one-off and ongoing, much of the February payment will have been spent – though the normal level of salary and running costs will still need to be covered.

For this reason, providers may explore how they can fund staff redundancy payments. It is unlikely that there will be enough money in the system to support the current level of recurrent salary and pension costs until the next SLC payment arrives in the late spring. As we are already seeing on some campuses, staff on temporary contracts or lower rates of pay (overwhelmingly the promising young researchers that we should really be supporting as they begin their careers) are likely to be hardest hit, simply because not renewing a temporary contract is far more straightforward, and far cheaper, than making a permanent member of staff redundant.

Cuts to staffing at this point will make the provider less able to recruit to normal levels in future years, unless they are prepared to tolerate a serious drop in staff:student ratios and associated hit to the student experience. Certainly, some institutions may be expecting to recruit more than they usually would for the 2021-22 academic year, with formal and informal student deferrals from this year adding to the beginnings of demographic growth in 18-year-olds. Universities that have shrunk their staffing to contain costs will be unable to offer learning opportunities to this increased pool of potential students.

A lack of liquidity also puts stresses on any financial agreements that universities may have entered into. Since before the 2008 financial crisis borrowing has been incredibly cheap for universities, and these funds have been used to update and refurbish campuses that had been neglected during leaner times. Though borrowing has been set carefully so repayments are manageable this may not be true by February 2021. While the affordability of existing finance arrangements may become a challenge, lenders are generally keen to work with universities to ensure existing commitments are manageable and long term financial sustainability is possible.

That said, when these discussions take place the cost of borrowing could increase as agreements are renegotiated. Shorter repayment periods and higher rates of interest are possible outcomes, as are more restrictive covenants placed on financial performance. These changes would have an impact on recurrent spending – the same pot from which staff salaries and pensions are paid.

Long term losses

The damage from low recruitment in 2020 will be felt by providers for at least three years. The 2020 cohort will be smaller than usual, and will thus bring in less fee income compared to other cohorts every year of their time at university. This means providers will be able to afford to employ fewer staff for the short-to-medium term, with an impact on both teaching and research capacity.

For some universities and colleges, the problem will be existential. It will simply not be possible for them to continue operating without some kind of additional cash injection. As well as being a waste of talent and capacity on so many levels, this will have an impact on other providers who may be asked to “teach out” students at financially failing institutions. Such arrangements may offer some temporary employment for affected staff.

Meanwhile, at some point in the spring of 2021, the Office of the Independent Adjudicator for Higher Education (OIA) could make a ruling on fee refunds for students who studied at university in the spring, summer, and autumn terms of 2020. There is also the possibility that courts will rule on consumer law cases brought by students.

Both these may set precedents, resulting in large payments by providers to current and former students whom the OIA judges to have received a lower-quality online learning experience during the Covid-19 pandemic. While good news – individually – for the students, such payments may put further financial stresses on providers at the point in the year they would have least liquidity.

And – in the likely event of longer-lived financial damage to the global economy, other institutional costs will rise. Borrowing could become more difficult and more expensive, and there is the likelihood that universities will again be asked to cover increased pension liabilities. While a global slowdown can see a counter-cyclical impact on demand for higher education – with the newly unemployed seeking to reskill – without the capacity to manage this demand, universities, and the country, may not benefit.

More bad news

In earlier pieces on the financial impact of Covid-19 we were accused of being “bleak” – of taking an extreme worst-case scenario. In this article, we are not building any scenario at all. With the exception of the precise level of the dip in recruitment for home and overseas students at all levels – applicant mood is shifting and has not yet settled enough to make a detailed prediction – there is no sense in which we can look at a worst-case or a better case.

We hope – as the whole sector hopes – that the pandemic will recede, and it will be safe to contemplate a full return to teaching at all levels. We hope that, if this is the case, applicants will realise that this is the case. Otherwise, unless there is a bailout, some version of what we describe above is a highly plausible scenario.

The time is ripe to get to know your own institutional finances.

3 responses to “The shape of the financial crisis to come?

  1. “As well as being a waste of talent and capacity on so many levels, this will have an impact on other providers who may be asked to “teach out” students at financially failing institutions. ”

    This is why I don’t buy talk of mergers – takeovers – yes and sometimes I wonder if it would even be full takeovers – does anything legally stop the TUPEing of academics and other staff alongside the sale of a building?

    I’m also doubtful the national pay frameworks will survive.

  2. This article describes the SLC fees and maintenance situation for Engish-domiciled students, mainly studying in England. Are we any clearer on what the Barnett or any other consequences are for funding of the devolved administrations, particularly in Scotland – where for Scottish domiciled students studying in Scotland fees from SAAS are a much lower share of income : £1,820 for degrees, £1,285 for HNC/D (still a large part of the HE offer); compared to up to £9,250 for English domiciled students); and therefore the cash flow consequences for Scottish institutions are far more significant?

  3. Pure mergers are technically where two or more legal entities are dissolved and a new body is created taking on the assets and liabilities of its predecessors. Most HE mergers have in fact been takeovers by one pre-existing institution of the assets of others, and the terms of the takeover involves contractual obligations for the TUPE of staff and transfer of buildings etc. Sometimes a predecessor institution is legally dissolved but sometimes it’s just a transfer particularly in the case of a demerger; while there may be name changes etc, only on very rare occasions is a new organisation created, instead the receiving institution just changes whatever is needed to accommodate the new entities, including sometimes the overall name but not the fundamental organisational continuity. The existence of a legal framework for chartered and statutory institutions is a key driver of the practicalities, though of course the new breed of private university is primarily governed by company law.

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