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Universities should spend their cashable reserves

Continuing the debate started by their report published on Monday, Jonathan Simons responds to the critics - and argues universities do indeed have reserves which could be used if policy and funding is rebalanced to save FE.
This article is more than 5 years old

Jonathan is Director of Education at Public First

On Monday, we published our report arguing that to improve standards of technical and professional education, government should, amongst other things, reallocate up to £532m from HEFCE grant of funds towards FE colleges. My rationale for doing so was set out in a piece for Wonkhe here. Since then, it’s been good to see a range of responses from others in the HE sector and FE sector discussing what the impact of this would be, both on this site and elsewhere.

Given the importance of this issue, and the upcoming Spending Review, I wanted to take the opportunity to address a few of the most significant points that have been raised so far.

I think there are three questions that deserve  a proper answer: why has Policy Exchange sought to pit HE against FE; are there really significant reserves within the university sector; and even if there are, does it make sense for government to compel universities to draw on them?

On the first, we were at pains to point out (as, helpfully, some of the commentary around this has recognised) that in most senses this is not an either/or. Indeed, as our report says: “it would be a mistake to conclude, and this report does not, that universities that universities can and should play no role in the provision of higher level professional and technical education”.

We devote a decent proportion of the report on good practice looking at how co-operation between the two sectors works and making suggestions on how that can be deepened. So it is simply not true to say that we have argued university is solely for academic study and FE is for practical study. However, in one very important context we are unapologetic in saying that the two sectors are in practice pitted against each other, and that is in the competition for resources in the Spending Review.

There is no escaping the following facts: both sectors are funded from within the same department; that department will be required to make, as other unprotected departments are, savings of somewhere in the region of 25%-40% over this Parliament; and  that HE (and science) and FE between them make up around 85% of that department’s budget. As Martin Donnelly, Permanent Secretary of BIS said to the Public Accounts Committee this week, this means a more integrated system of tertiary education. I couldn’t agree more. That’s why having two separate funding systems is a mistake, as is a system where one (increasingly arbitrary) half of it receives far more money than the other half. A reallocation of funds as we propose actually supports a more integrated system by (partly) levelling the playing field.

Second question – are universities really sitting on all these reserves, or have we misunderstood HE finances? This was a question initially raised by Andrew McGettigan on his blog, which you can read here, as well as a discussion in the comments underneath setting out my position. In short – no, we don’t believe we have misunderstood or misinterpreted the situation on reserves. Andrew is absolutely right that there is a rogue reference to cash in one instance when we discuss the £12bn. But throughout our report, it is absolutely clear that we refer to the £12bn, as HEFCE does, as “discretionary reserves” (or sometimes just “reserves” or “operational reserves”). That’s a really important term. For although these reserves aren’t all held as cash, they are all cashable (ie they can become cash relatively easily). And they are discretionary, in that they are not currently legally bound to a specific area of spending.

Chris Hale from UUK in his response to our report argues that we need to distinguish between the accumulated total £12bn, and the annual operating surpluses (or, in some instances, deficits) of institutions. I quite agree – and indeed our report does just that, where we show (on page 29, figures 2.9 and 2.10) how “years of consecutive surpluses have allowed universities both to expand spending on non recurrent items of expenditure (i.e. capital) and to build up reserves”. This is also exactly what Chris’ graphs in his blog show. In fact, I would argue those graphs make our point very clear. His figure 4, for example, shows that although capital expenditure is forecast to decline from its record high of 2014/15, projected spend on capital in 2015/16 and 2016/17 is still higher than in every year from 2009/10 to 2013/14.

Similarly, Chris’ figure 3 demonstrates that although operating surpluses dipped in 2014/15, surpluses are also projected to increase again in future years, and even the 14/15 figure is higher than every year from 2000/01 to 2008/9. In other words, on UUK’s own data, there has been a slow down from record highs in capital spend and operating surpluses, but this is still well in excess of the position of earlier in the decade. Taken together, it is exactly these years of operating surpluses which have built up to the total level of reserves which we identify as being able to be used more constructively.

Which brings us to the third question – should these reserves be used? It is worth pointing out, again, that I have always completely accepted Chris (and others’) point that universities need some level of operating surplus and reserves in order to fund private capital spend, both to compensate for declining public sector capital and also to attract students in a global marketplaces who come with high expectations around the university estate. It is also true that, in the long term, a business model that relies on drawing down from reserves or other lump funding in order to support day to day revenue costs is an obviously flawed model.

But this isn’t what we propose, and it’s important that this is recognised as the straw man that it is, for two reasons.

Firstly, an argument that any reduction in revenue must automatically lead to a drawing down of reserves makes the implicit assumption that costs are fixed. And this clearly isn’t true. There remains, I believe, significant scope for many if not most universities to go considerably further on efficiencies in order to bring down their cost base. Our report estimated that, using the the past three years of data, the sector has on average made 1.5% efficiency savings. That’s pretty low in the context of what other public services have done, and I find it deeply implausible that there isn’t much more that can be done that would avoid needing to draw on reserves.

Secondly, even if a university does need to draw on its reserves in the short term, that is an entirely legitimate and understood practice, so long as there is a plan to stop that being a steady state model. I was previously a trustee for a small charity, and when the economic situation was bleaker a few years ago we drew on our reserves for a couple of years in a row in order to manage ourselves through whilst finding ways to reduce costs and increase revenue. Indeed, the guide to HE finances drawn up by the Universities and Colleges Employers Association (UCEA) in association with the British Universities Finance Directors Group (BUFDG), and cited by Andrew on his blog, says “If you have substantial equity, you can live on your wealth for a time. It may not be a very good idea, because you’re using up the family silver, but it can give you breathing space”.

That’s exactly our argument – that the exigencies of the current public spending situation and the level of reserves justify such a move. This is even the case when some of these reserves are held as property – just as the NHS is doing via NHS Property Services Ltd, or central government is doing via the Cabinet Office’s estate strategy, set up under Francis Maude, which has saved £600 million a year in running costs and brought in a cumulative £1.4 billion (since May 2010) from the sale of land.

It is not surprising that any sector who has its funding levels questioned will seek to defend itself. But I remain firmly of the view that in the current climate, universities could and should help contribute more to the cause of public sector spending restraint, and to the overall growth of higher level professional and technical education, via more effective use of their reserves.

One response to “Universities should spend their cashable reserves

  1. Your report makes no mention of property and this whole post is an ad hoc rewriting of the original claim that ‘HE … has substantial cash reserves which could be better utilised than sitting in banks’ (p.11 of your report).

    The reference wasn’t rogue and your revisions happened after you had to correct the first blog post (because you confused surpluses and reserves) and after you were then told that the £12bn figure from HEFCE was not a measure of cash reserves (http://andrewmcgettigan.org/2015/10/19/policy-exchangess-accounting-errors/ ).

    ‘Discretionary reserves’ (endowments + general reserves), a balance sheet measure, is not synonymous with ‘cashable reserves’ (e.g deposits plus saving accounts) or ‘operating reserves’ (https://philanthropy.com/article/What-Operating-Reserves-Are/190577 ).

    ‘Cashable’ means cash or near-cash – it is sufficiently liquid that it can be used to settle claims or converted quickly into cash (think of how you might have to give notice to move money from savings accounts to other accounts used for payments). It does not cover everything that is booked with a monetary value; it does not cover fixed assets.

    If you are shifting to this new claim that property disposals are what you meant, then you would need to show what general level of spare estates capacity existed in a sector that is supposed to be expanding in terms of domestic home undergraduates and ‘export targets’.

    But in any case the £12bn discretionary reserves figure doesn’t tell you what you claim about spare capacity or spare cash.

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