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1. Financial forecasts prepared early in 2002 projected a deficit £11.6m1 in 2002-03, growing to £24m in 2005-06. The Finance Working Party was established by the Planning and Resources Committee in May 2002 to advise on how to reverse this trend, and in particular the steps needed to achieve break-even in three years and a return to a surplus in five. The members of the Working Party were :
Professor Malcolm Grant (Pro-Vice-Chancellor, Chairman)
Professor Ian Leslie
Professor Peter Goddard
Professor Tony Minson
Mr Nigel Brown
2. The problem of a projected deficit is faced by many in the sector. The White Paper (paragraph 1.31) identified a drop of 36 per cent in funding in real terms per student between 1989 and 1997, levelling off thereafter. Research sponsors - including the Government - fail to pay the full costs of research. But despite the clear evidence of under-funding, the University has maintained the quality of its teaching, came first in the UK in the 2001 Research Assessment Exercise, and remains in the front rank of universities internationally. The projected deficit of £11.6m in 2002-03 also has to be viewed against the University's £450m turnover, and its endowment and cash reserves.
3. There were indications of additional funding in the Comprehensive Spending Review and the Government's recent White Paper, but they are not sufficient in themselves to restore the University to good financial health. The HEFCE grant for the University, announced on 5 March 2003, includes a significant uplift in QR funding for research, but a reduction in funding for teaching. The improvement in the grant does not reduce the need to implement the recommendations of the Working Party.
4. The Working Party believe that on current forecasts the return to break-even in three years can only be achieved by measures that would damage the University. The financial problem is chronic, and cannot be allowed to continue, but it is not so severe as to require the University to be damaged as a consequence of financial recovery. The Working Party instead identified a number of measures the University can take to ease the current problems and to reverse the trend over a longer period. These measures need to be adopted by both Schools and non-School institutions, and by both academic and non-academic activities. They need to be monitored and kept under review.
5. Some measures are recommended for implementation during the next financial year; others are structural issues which require further review and development but have the possibility of delivering considerable future efficiencies. They are all sensible measures which will strengthen the University, and help it make the best use of its resources, whether or not the external financial climate improves.
6. Some of the problems stem from the University's 'core plus' approach to annual budgeting, in which the baseline expenditure from the previous year is rolled forward with the annual addition of 'New Needs' but without detailed examination of the spending within the baseline; others from the artificial division of funds between the 'Chest' and 'non-Chest'. The Working Party focused on a number of areas of income and expenditure, and their main conclusions are set out below. The work is not complete: the Working Party recommend that work should be continued by a successor body, which would also oversee the further development and introduction of a Resource Allocation Model.
7. A Resource Allocation Model (RAM) is not a solution to this or other problems, but it will provide new incentives and new responsibilities which will help promote the culture change necessary to take a unified approach to the University's finances. The RAM models how income is earned and expenditure incurred, and will have to be applied with moderation (that is to say a phased transition from current levels of funding to a new Formula Funding approach). It requires further development, but it is an essential tool for the planning process.
8. The new Financial System, CUFS, provided detailed data that had never before been available and that allowed the Working Party to understand the financial flows in the University in relation to teaching, research, staffing, space, fees, trusts, and other discretionary income. The Working Party would have faced an impossible task without the information now being delivered from CUFS. Attention must now be focused on financial management, of which a key component is the development and introduction of a RAM for the 2004-05 funding round.
9. The formula used by HEFCE for measuring teaching costs in universities includes assumptions about the unit cost of teaching in various subject groups and levels. The University has too little information to test the extent to which teaching costs at School, Faculty, Department, or subject level are covered by the revenue from HEFCE and from fees attributable to teaching activity. Further work is needed to identify much more clearly the costs of teaching and how it is funded. This will be assisted by the development of a comprehensive financial model for the University, on which work is now in hand.
10. Income for research is earned as formula funding based on quality and volume, and grant and contract income from public and private bodies for defined programmes of work. Meeting the cost of this research requires high ratings and maximum recorded 'volume', and for the full direct and indirect costs of project-based research to be established and met. The Working Party found some scope to increase formula funding and emphasized the importance of preparation for the next Research Assessment Exercise. They identified the costing of research to be an issue, and recommend reviews of the targets for recovery of overheads.
11. The University's Financial Regulations provide that Faculties and Departments must ensure that funds in donation accounts and special accounts are applied for charitable, educational, and research purposes only. There are over 1,100 donation and special accounts. The problem for the University is that activity supported from these accounts incurs overhead costs but without reimbursement. The Working Party recommend that - with due allowance for exceptions - this anomaly is closed by charging an overhead on salaries met from these accounts.
12. The trend in pay costs is well above inflation. The increase is due to a number of factors including new appointments and promotions. Cost control is not a simple matter of putting the process into reverse by releasing staff because of the complexity of individuals' roles and because many individuals attract income that supports other activity.
13. An early step in 2002 has been to freeze vacancies as a temporary savings measure. In the event, the freeze delivered only a modest saving in return for considerable disruption; and the Working Party - in accordance with their principle that measures should not be seriously damaging - recommend that the freeze be lifted from 1 August 2003. Schools and non-School institutions will be asked to produce staffing plans by then, according to instructions yet to be agreed, as components of wider plans showing how Schools and other institutions will move to new levels of funding under the proposed RAM.
14. In future, the RAM will introduce incentives in this and many other areas that will enable and encourage the control of costs.
15. Data appear to show over-supply or under-use of teaching space in Cambridge as compared to other universities, but departmental experience is often of tight constraints on space. This is a difficult long-term issue, but with the prospect of savings through rationalization. As part of the development of their plans, Schools and central institutions will be asked to review their use of the estate. Maintenance costs and responsibilities will be reviewed. There will also be a high-level review of options for the Estate.
16. The Working Party noted that the new Capital Projects Process, which has been circulated to the Councils of the Schools, will ensure that plans for new buildings do not progress without sufficient funding for the capital and recurrent costs.
17. The Working Party were aware of the sensitivity in considering University Composition Fees. The General Board's Review of the M.Phil. states that the 'RAM will heighten awareness of the advantages, to a School and its institutions, of increasing fee income. This is bound to raise the issue of fee rates' and recommends: 'devolution of resourcing responsibility must bring with it an opportunity to set a rate of fee above the standard rate.' The review also suggests that new course proposals should be considered in terms both of their academic rationale and their resource implications and that costing models be devised. The Working Party noted - and endorsed - the proposal from the M.Phil. review that there should be flexibility in setting fees but recommended that minimum fees be set two years in advance, giving an opportunity for any variation from the minimum to be considered, recommended, approved, and announced in good time.
18. White Paper proposals were still too uncertain when the Working Party reported to offer firm financial assurances. The Working Party were aware of current Council policy on 'top up' fees, but in their view higher home/EU fees at the maximum level proposed by the Government could be an essential component of the package of financial measures needed to correct under-funding.
19. The Working Party also reviewed overseas fee rates. They compared fees (including College fees) and full living costs for a number of peer universities, and concluded that there was scope for the University to raise fees slightly above inflation.
20. Increases in fees may require investment in additional support to ensure the University can continue to admit the best students internationally, irrespective of their financial circumstances. Additional investment reduces the income from a rise in fees. The Working Party are aware that the effects, including the effect on application and admission rates, require careful monitoring.
21. Large balances have been allowed to accrue on some trust accounts and their purpose must be established. There are various steps that can be taken to assist managers of Trust funds to fulfil more easily the purpose of their Trusts and there are opportunities to use Trust and other funds, within the terms on which they are held, to substitute for expenditure by the Chest. There will be exceptions, but the Working Party recommend that in general, and where permitted, an overhead should be charged when salaries are met from these funds and that interest should cease to be payable on some balances in some discretionary accounts.
22. The Working Party made a large number of detailed and strategic recommendations which, subject to the acceptance of their report, it will be the responsibility of a number of committees and individuals, from Chairmen of Faculty Boards and Heads of Department to the Council and General Board, to take forward. Progress must be monitored by the Planning and Resources Committee.
23. There are a number of major strands:
| • | The Resource Allocation Model must be developed by a new RAM Development Group reporting to the Planning and Resources Committee, with a view to informing the forthcoming budgetary round and for the output of the model to be the allocations from 2004-05.2 |
| • | The manner in which the deficit is distributed and the amount of support required until a return to surplus are key questions to be addressed during the further development of the RAM. |
| • | Schools and other institutions must prepare for - and be equipped to cope with - the new disciplines of the proposed RAM, which must be developed and presented transparently. |
| • | Work must progress on the University's Strategic Plan, informed by School and other strategies. New needs are unlikely to be approved without compensatory contraction or guarantees of full funding. |
| • | Attention must be paid to the stewardship of Trust Funds. |
24. The following measures are recommended for implementation in 2003-04. Decisions on these recommendations will be brought forward in the Allocations Report for 2003-04. The goal during the year is to stimulate the culture change necessary for the new regimes under the RAM in terms of a full understanding of costs and how to regulate and recover them:
| Financial measures | Potential financial effect |
|
Lift freeze on vacancies Raise Overseas Student fees by inflation plus 2% in the years 2003-04 to 2005-06 2005-06 Raise effectiveness of overhead recoveries within grants and contracts Discontinue payment of interest on some deposits Effective use of Trust Fund income Overhead on salaries met from donation and other accounts Use of mainly departmental reserves to meet costs unaffordable Unquantifiable by Chest |
Effect of freeze included in forward forecasts to be removed £0.4m in 2003-04 rising to £1.2m (gross) in 2005-06 £1.19m in 2003-04 rising to £8.2m in 2006-07 £2.6m from 2003-04 £0.4m from 2003-04 £1.4m in 2003-04 rising to £4.2m in 2006-07 Unquantifiable |
| Non-financial measures |
Continue - and complete if possible - the University Strategic Plan Develop School and non-School plans to show, inter alia how they will move to the new financial position under the RAM Establish RAM Development Group and consider and introduce any strengthening of departmental staff to cope with RAM implementation Agree a clear statement that capital projects will not be approved without assurances on whole-life costs Investigate the purposes of all reserves with balances greater than £100,000 |
25. For study during 2003-04; for conclusions to inform allocations in 2004-05
Measure |
Develop total budgets incorporating Chest and non-Chest income and expenditure Review rates of overhead recovery Widen adoption of procurement policy Introduce variable postgraduate fees Value for Money Studies: Income from trading, catering, stores, maintenance, energy, insurance, security, etc. Capital Budgeting process Review of committee relationships and exercise of financial responsibilities |
26. For study and incorporation in long term strategy
Review allocation and use of teaching, office, workshop, and storage space Consider if there are radical options for the University estate Maximise the benefit from the next RAE School reviews of academic organization Strategic management of staff resource throughout the University |
27. The full report of the Financial Working Party will be available from 12 March 2003 on the University website at: http://www.admin.cam.ac.uk/cam-only/committee/council/. The issues will be addressed in the Allocations Report for 2003-04.
1 If the bids for 2002-03 with a total cost of £42m had been accepted in full, the University would have faced a projected deficit of £34m.
2 The Planning and Resources Committee at their meeting on 20 February 2003 constituted the RAM Development Group as follows: Chair: Professor Malcolm Grant, Pro-Vice-Chancellor; the Chairs of the six Councils of Schools; one representative of 'non-School' activity; one representative of the Colleges; the Treasurer; up to two members co-opted by the Group.
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Cambridge University Reporter, Wednesday 12 March 2003
Copyright © 2002 The Chancellor, Masters and Scholars
of the University of Cambridge.