The sector holds £44bn in reserves and has a yearly income of over £42bn.
So says UCU general secretary Jo Grady. She adds –
University vice-chancellors have been given multiple opportunities to use the sector’s vast wealth to resolve these disputes.”
To be fair UCU probably isn’t alone in wondering why universities don’t use our reserves to address the multiple challenges we face. I am pretty sure past and current senior politicians have had similar thoughts.
What are these reserves?
Jo Grady is factually right to say university reserves are over £42 billion. To be precise unrestricted reserves for the 285 HE providers in the UK HE sector total £42.7 billion as at 31 July 2021, the latest data published by HESA.
Kudos to UCU for focusing only on unrestricted reserves because providers also hold nearly £10 billion of restricted reserves, mostly endowments, taking total sector reserves to £52 billion. But restricted reserves are not available to vice chancellors to deploy because they have legal restrictions on their use specified by donors or grant sponsors.
But what about the £42 billion unrestricted reserves, can vice chancellors use this vast wealth? They can, but there is a catch.
The HESA data splits the £42 billion of unrestricted reserves into two major pots: £36 billion of income and expenditure reserves and £6.7 billion of revaluation reserves. We can put the revaluation reserve aside, it’s a valuation gain that only exists on paper at a point in time (the balance sheet date) and could only be spent if the underlying asset, typically land and buildings, is sold and converted to cash.
That vast wealth in full
That leaves the £36 billion of income and expenditure reserves – so how can the Vice Chancellor get her hands on these?
To answer this we need to understand exactly where these reserves come from. Let me illustrate this with a simple example:
- A university generates a surplus of £1m over the last year
- At the year end this might manifest itself in cash balances being £1m higher, let’s assume it does.
- It will definitely result in reserves being £1m higher because that’s what your Finance team do at the year-end, they transfer the university’s surplus for the year into Reserves, to “close the year-end” before moving on to the new year.
- For the accountants among us this means net assets, which include real assets like cash, have increased by £1m while Reserves, on the other half of the balance sheet, have also increased by £1m. Net assets equal Reserves; double-entry book-keeping in action!
- Now assume our VC agrees to buy a £1m black-box machine for Professor X’s research. At that point cash goes down by £1m to fund the purchase while fixed assets go up by £1m.
- There is no change to net assets because all that’s happened is that one type of asset (cash) has been swapped for another type of asset (equipment) on the same side of the balance sheet.
- At this point the value of Reserves has not changed so net assets still equal total reserves.
There are two key insights from this:
Firstly, unrestricted income and expenditure reserves are made up of the accumulation of all our past surpluses over many years – that is a fact.
Secondly, the cash that they might once have represented has long been spent, mostly funding our former capital programmes, on buildings and equipment.
Campus capital
Universities fund the vast majority of their capital programmes from their own cash (past surpluses), supplemented by borrowing, capital grants, receipts from occasional asset disposals and philanthropy.
This is a different model from publicly limited companies (PLCs), whose shareholders provide the PLC with capital, in return for which they expect the PLC to produce high profits to pay out annual dividends. University stakeholders don’t provide us with capital (but nor do they expect dividends) so we need to generate modest surpluses to fund our own capital programmes.
But back to the question of whether vice chancellors can spend the sector’s vast wealth reflected in their £36 billion of unrestricted I&E Reserves.
Well yes – they can. But the catch is that they would need to sell off their campuses, their land and buildings, pay off their debt, pensions and other liabilities with the proceeds, then in theory they would have exactly £36 billion cash in the bank. That’s exactly how to read the Reserves figure on your university’s balance sheet.
A red herring
I don’t think UCU are advocating we liquidate the sector to raise cash. Perhaps they are suggesting we sell a bit of the campus off – not all of it, a spare building here and there maybe.
It’s at this point that the CFO steps in. It’s a really bad idea to sell assets to fund increases in recurrent costs like pay and pensions. You can only sell assets once, we can only use cash balances once.
To fund higher recurrent pay costs we need to either earn more income recurrently or make cost efficiencies recurrently (usually a euphemism for staff reductions). The government is not going to increase the £9,250 tuition fee (£9,000 in Wales) anytime soon, so working out how we afford higher pay costs is a shared challenge for vice chancellors and UCU.
Reserves are a red-herring. In my career as a CFO I’ve rarely looked at them. They are an historical figure and an artefact of double entry book-keeping, pretty much devoid of real meaning.
Balance sheets do have value, but we should focus on the real side of the balance sheet, the net assets side, and that means cash. A previous article on Wonkhe by a former colleague delves deeper into this aspect.
Campus Capital is an interesting concept, many Universities use/d it as an anchor for their local pension scheme’s for non-academics, though new employee’s are usually now put into scheme’s run by outside providers. Though many Universities own vast tracts of land, not just housing they rent out around them, often many miles from campus that could be sold, the long term loss of those ground rents would need to be off-set against any immediate cash gained. There IS a balance to be struck, and with both sides becoming entrenched it’s those unseen employee’s at the bottom, the cleaners and other non-academic roles who are really suffering.
Thanks for your insights on the nature of a surplus. I’ve a question though, is it not the case that forecast budgeting for salaries assume a pay award of an average 3% year on year? If so, the average pay awards actually paid out over the past decade have been significantly lower than 3%. So what happens to the real cash savings from one financial year to the next when the actual pay awards are lower than forecast – surely that’s not a tied up capital asset? Or is that underspend used to underwrite the remuneration packages for the senior management teams?
Good piece – two other points – “the sector” is a collective and it doesn’t mean that HEIs lend or grant cash to one another; also, most staff (and students) do want nice facilities and equipment, so liquidating their value is rather risky and would reduce overall ability to provide in-person teaching and research
What UCU (and most university staff) most likely object to is the view that the cash and buildings etc are the only assets – but really staff are also assets. Without them there is no teaching or research. VCs are choosing to fund the vanity projects (like buildings) and not their human assets. It’s a choice.
Having said that, one weakness I see with the UCU dispute is that not all universities are equal. So while some may have large surpluses, others are carrying significant losses. this makes a sector wide solution challenging. But fundamentally we are in this position because VCs have not come together to protect the sector and play hard ball with government.
One has to wonder about the financial sustainability of those universities that seem to have been operating at deficit for a number of years. Add on the COLC and I’m not sure some of the smaller institutions will survive.
Thank you for a great article which tackles important issues. On the issue of selling buildings etc, it is interesting that many private sector businesses have been reducing their physical assets as a proportion of their balance sheet and recognising the great value of their staff through the good will valuations on their balance sheets, indeed a number of university academics have documented this trend over recent years. This option is not open to publicly funded universities with charitable status because they do not have traded shares and they are not bought, sold or merged with good will valuations transferring at the point of sale. However, the requirements of Net Zero and university operations in a post-Covid digital world should give university CFOs pause for thought about the balance between their institution’s investment in physical assets and their staff. Why are universities holding so many poorly utilised buildings; engaging in sale and lease back arrangements on halls of residence and involved in highly leveraged finance (e.g. debt at 50+% of income) when market conditions reveal the significant risk associated with this activity.? Staff costs as a percentage of income in many universities are a little over 50% with 50% gong to support functions. Is this really the scale of commitment that should be made to what is inherently a human business? Other educational institutions in the tertiary sector typically have debt as a proportion of income at circa 30%, salary costs at 60-70% and management overhead at closer to 30%. In a market environment fixed asset hoarding and inefficient staffing would be challenged through the threat of takeover. In a regulated publicly funded charitable sector we have to rely on effective regulators. The subject of another post perhaps?