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REPORTS

Report of the Council on the financial position of the Chest, recommending allocations for 2005-06

The COUNCIL beg leave to report to the University as follows:

1. This Allocations Report reviews the financial position of the University and recommends allocations from the Chest for the financial year 2005-06.

Overview

2. The financial position of the University is responding to the action taken over the last two years. The immediate position continues to be tight but, as a result of additional income combined with control of expenditure, prospects are noticeably better than they have been for several years. Increased devolution of financial planning and management to Schools and other institutions has resulted in improved control of growth in expenditure and in more effective use of resources.

3. Projected additional funds, arising primarily from the planned shift to 'Full Economic Costing' (FEC) of research and from additional fee income, suggest that growth in income will exceed growth in expenditure despite predicted increases in core costs and in pay costs consequent upon implementation of the forthcoming proposals for salary restructuring. In consequence, as shown in the table, the forecast Chest deficit for 2005-06 is smaller than previously projected and the University should move to a small operating surplus by 2007-08.

Target Chest

surplus/(deficit)2004-052005-062006-072007-08
 £m£m£m£m
Last year(11.8)(12.0)(9.5)(6.5)
Now(10.1)(9.8)(1.2)6.6

4. Although the position is now more favourable it is important to note areas of continuing concern. The proportion of the University's income that is derived from research activity is rising steadily and the financial position is therefore increasingly dependent on our ability to maintain research quality and to increase research volume while improving recovery of indirect costs. The HEFCE review of teaching funding and the 2008 RAE (Research Assessment Exercise) introduce uncertainties into future estimates of the HEFCE block grant. Finally, there is a continuing need for investment in staff and facilities, and the projected surpluses offer no easy solution. Accordingly, it will be important to sustain the progress that has already been made in controlling expenditure and promoting the most effective use of resources across the University as a whole.

5. In the medium and long term, the University must also seek to generate sufficient surplus to invest in capital infrastructure and new initiatives. The intention of Full Economic Costing is to fund research on a sustainable basis, and this may lead to a reduction in capital funding streams from HEFCE, from which the University has benefited greatly in recent years.

Latest forecast: 2004-05

6. The Council reported in May 2004 (Reporter, 2003-04, p. 716) that they estimated that the total income for the year 2004-05 would be £518.1m, of which £238.3m would be Chest income and £279.8m would be non-Chest, or restricted income. The overall position was expected to be a deficit of £(11.8)m on the Chest. The latest forecast is for a Chest deficit of £(10.1)m. The main changes compared to the original Estimate are summarized in Appendix 2.

Estimate for 2005-06

7. Last year's Allocation report projected a deficit of £(13)m but noted that management action by Schools and institutions in the context of the Resource Allocation Model (RAM) would reduce the deficit to £(12)m. The current estimate is somewhat lower at £(9.8)m. The HEFCE block grant increased by £1m more than predicted but the formula changes in the T and R elements result in an increase in the projected College fee transfer of £3m. This reverses the recent trend of below inflation increases in the College fee transfer, but also reduces the University's predicted unallocated Chest income by £2m. The major change to predicted income to the Chest is an increase in 'transitional funding' from the Research Councils of £9m prior to the full implementation of FEC. Notable unpredicted increases beyond already planned expenditure arise in respect of utilities costs (£1m), further development of the Cambridge Student Information Service (CamSIS) (£1m) and a further increase in contributions to the University's Contributory Pension Scheme (£1.2m). The Allocation to the Minor Works Fund is increased by £1m primarily to enable modifications to buildings and facilities to allow disabled access to be implemented.

Looking forward: 2006-07 and beyond

8. Current projections show the University moving to an operating surplus of about £12m in 2008-09, but with a total income in excess of £600m this represents barely 2% of annual turnover. This level of surplus is inadequate to support the investment required to maintain the international position of the University and is, in any case, subject to uncertainties, notably projections of research volume, and the impact of pricing on a full economic basis. The level of HEFCE funding for teaching is largely outside the control of the University. Room for manoeuvre will depend on the success of the 800th Campaign to generate investment for key priorities and to substitute for current expenditure from general funds, and in our ability to use resources more effectively. The effect of devolved budgeting and planning is encouraging in the latter respect. This is the first year that Schools and institutions have produced plans for the future within a financial framework, and there are clear indications of a desire to make better use of resources, particularly space, and to prioritize investment.

The RAM and the Planning Enquiry

9. The Council and General Board reported in November 2003 (Reporter, 2003-04, p. 182) on a Resource Allocation Model (RAM) for 2003-04 built on the 2003 Allocations Report and Estimates. The model was rolled forward for the single year 2004-05 incorporating data from the 2004 Allocations Report and Estimates, and an outline of that model and the financial assumptions in the financial forecasts in the 2004 Allocations Report were then the basis of a roll forward for four further years. This forecast RAM was used to indicate to Schools and other institutions the level of resource available to them for the purpose of forward planning. The detail of the planning enquiry, its overall purpose, and the guidance provided to institutions, is available at http://www.admin.cam.ac.uk/offices/planning.

10. The operational and financial plans submitted by Schools and other institutions were discussed in a series of individual meetings between the Chairman of the Council of each School and the Pro-Vice-Chancellor (Planning and Resources). Similar meetings were held between the Heads of institutions outside the Schools and the Pro-Vice-Chancellor (Special Responsibilities). All contributors invested considerable time in preparing their plans and in responding to the feedback arising from those meetings and are congratulated on a successful exercise. For the first time, detailed five-year forecasts related to planned activity for each School and other institution have been used to inform the proposed Allocations for 2005 as described elsewhere in this Report. As this integrated approach took into account likely levels of savings targets there should be no need for separately identified savings targets when translating these forecasts into detailed budgets.

11. The exercise identified a number of School and University-level issues for consideration by the central bodies. Consolidated student number forecasts have been produced from School plans. The forecasts have been circulated for review by the Undergraduate Admissions Committee, the Board of Graduate Studies, and, through the Colleges' Standing Committee, Senior Tutors. The conclusions of this review will inform the University's response to the HEFCE invitation to participate in a regional approach to the award of Additional Student Numbers (see http://www.hefce.ac.uk/pubs/hefce/2005/05_14).

12. A revised University Strategic Plan will be drafted drawing on the material collected in the Planning Enquiry and will be the subject of later consultation.

13. The Council and the General Board intend the Planning Enquiry to be developed into an annual round in which forecasts will be reviewed and updated annually. Guidance for the first full round, drawing on the experience gained in this first exercise, and using the material collected during 2004 as the starting point, will be available later this term.

14. The planning round is intended to provide greater stability and certainty for Schools and institutions - and a means of introducing and implementing planned change - by the annual cycle of review of forecasts for a rolling five-year period. However, the main element of the RAM is its attribution of income, and some of the formulae mirror HEFCE funding processes which are subject to regular change, but the effect of which on the next year is only known in detail in the immediately preceding February or March. (Changes in HEFCE funding methods for 2005-06 are described below.) It follows that if the RAM is used annually to indicate resource only for the subsequent year, significant uncertainty will be retained until a very late stage in the review of expenditure plans for that next year. The RAM is therefore likely to be of greater use in an annually revised prediction of income for the planning period as a whole. The RAM Development Group will be considering how the RAM can in future most appropriately serve the planning process, while retaining the incentives in the RAM that link activity and income.

HEFCE Grant

General picture

15. The Secretary of State's letter to the HEFCE of 13 December 2004, outlining funding for the period 2005-06 to 2007-08, stated that funding for higher education would increase by £20 billion between 2004-05 and 2007-08. DfES funding for research would increase by 30% in real terms over the same period.

16. The HEFCE announced on 25 January 2005 that the total grant to institutions for the 2005-06 academic year was £6,332m, representing a cash increase of 5.6% on funding for 2004-05.

17. The HEFCE Grant Letter for 2005-06 shows that on HEFCE calculations Cambridge receives a 4.9% increase in resource1 for 2005-06 over that for 2004-05. This compares with an all-England, including Further Education Colleges, overall increase of 4.1% when adjusted for volume and 5.6% overall. This should be put in the context of an increase in the higher education pay and prices index (HEPPI) of 4.0% in the year to July 2004 and 5.9% in the year to January 2005.

HEFCE Funding for Teaching

18. With one important change, the basic HEFCE 'T' funding model is unchanged from 2004-05. The student volume in the T funding calculation no longer includes research students in year 1; the funding for these has been transferred to a new research degree programme (RDP) supervision fund.

19. Former special funding for minority subjects has been included in the mainstream teaching grant. There is a minor adjustment to compensate for a reduction in funding consequent on funding for improving the retention of part-time students.

Rewarding and Developing Staff (RDS)

20. There is a further allocation of £1.1m Round 2 funding for Rewarding and Developing Staff in 2005-06 embedded within the general uplift to teaching funds, but separately identified.

HEFCE Funding for widening participation

21. In 1999-2000 the HEFCE introduced formula-based grants to recognize the extra costs of widening participation of full-time undergraduates from disadvantaged backgrounds (the 'postcode premium'). A further premium was announced for 2000-01 to encourage the widening of access for students with disabilities. For 2003-04 a third stream to support retention was added. The basis of calculation of the 'postcode premium' was changed for 2004-05 to a measure of participation (full-time young undergraduates) or achievement (part-time and mature undergraduates) by ward. A further change to the full-time allocation for improving retention has been introduced for 2005-06 to reflect the replacement of the A-level points system with the UCAS tariff. There is a reduction in funding of £0.24m over 2004-05 in the stream for improving the retention of full-time undergraduates resulting from a change in the HEFCE algorithm which has reclassified a number of students from 'high risk' (of leaving) to 'low risk'.

HEFCE Funding for Research

22. 'QR' is calculated using measures of volume of research activity in Units of Assessment (OAS) weighted by a factor which depends on the rating in the most recent Research Assessment Exercise, with supplementary funding for 'best 5*' departments.

23. Research students in years 2 and 3 are no longer funded within mainstream QR (and, as noted above, year 1 students are no longer funded by the T formula). Supplementary R funding for supervision is discontinued. Home/EU research students are now funded through a new stream of Research Degree Programme (RDP) funding. Weightings have been adjusted for the remaining minor volume factors to ensure that the proportion of QR awarded on each factor remains the same as compared with 2004-05.

24. Funding for research libraries of national importance, formerly attributed separately under the Research Support Libraries Programme to support the costs of access by staff of other Higher Education Institutions, has been added to QR; transitional funding has been allocated to the six heavily used libraries of national importance to ensure that the distribution for them is neutral. Transitional funding will continue until 2009.

25. Taking all the changes into account, Cambridge has received an 11.8% increase in mainstream research funding.

TTA Funding for Teaching

26. Mainstream funds for initial teacher training (ITT) are stable, but there is a change in the mechanism for funding in-service training from INSET (Inservice education and training) to a Postgraduate Professional Development (PPD) programme, the full implications of which are still being explored.

Estimate for 2005-06

General introduction

Overall position of the Chest

27. The estimate for 2005-06 is for a deficit of £(9.8)m, an improvement on the latest forecast for 2004-05 and on the deficit for the same period projected in last year's Allocations Report. This has largely been achieved through continuing control of costs and slightly improved contribution to indirect costs in the initial stage of transition to the new FEC regime for pricing Research Council grants.

28. The Council remain uncomfortable with the level of deficit in 2005-06, but welcome the steps that have been taken towards restoring the University's finances to better health.

Preparing the Estimates

29. The estimated expenditure figures are based on detailed projections provided by Schools and other institutions as part of the Planning Enquiry. Other expenditure is adjusted for known changes or estimated from volume changes. New expenditure as proposed by the Resource Management Committee is included.

Student numbers

30. Taken together, the student numbers plans mentioned above show very modest growth in undergraduate numbers, but a slightly greater rate of increase in postgraduate numbers. Pending the review of these new forecasts, the trends used in recent Allocations Reports (which are not markedly different) have been continued. Undergraduate growth is assumed to increase slowly, at about 0.5% a year. Postgraduate student numbers are expected to increase at a rate of around 2.0% a year, with the majority of the increase in overseas student numbers.

Chest Income

31. Income is estimated to rise by 8.4% to £258.4m.

 Estimate
2005-06
Estimate
2004-05
Increase/
(Decrease)
 £m£m£m%
HEFCE/TTA grant161.2154.17.14.6
Academic fees and support grants48.946.12.86.1
Other operating income12.514.6(2.1)-14.4
Endowment and investment income10.19.40.77.4
Research Grants and Contracts24.514.110.473.8
Other services rendered1.2-  
 
 258.4238.320.18.4
 

Changes to the HEFCE grant are outlined above. Details of the remaining changes are as follows:

Academic fees and support grants

32. Fees: Home and EU students: The estimated income to the Chest from this source for 2005-06 is £21.5m. The University Composition Fee for a Home/EU undergraduate has been set by the Government at £1,175, with an estimated 14,383 students. The DfES have not issued a recommended Home/EU postgraduate fee level for 2005-06, but have recommended an uplift for inflation of 2.5% over the 2004-05 rate (in line with the forecast rise in the RPI for 2005-06) providing a fee of £3,085.

33. Fees: Overseas students: The estimated income to the Chest from this source for 2005-06 is £26.6m, which assumes 1,027 undergraduate students and 1,881 postgraduate students. Composition Fees for overseas students were increased by 2.0% above the rate of inflation for 2004-05 and this above inflation increase is being maintained for 2005-06 and 2006-07. Part of this increase is providing additional resources for overseas scholarships.

Other operating income

34. It is estimated that income will total £12.5m, made up as follows.

 Estimate
2005-06
Estimate
2004-05
 £m£m
Transfer from UCLES4.04.1
One-off transfer from UCLES0.04.0
Refund of VAT (recurrent)2.52.2
Arts and Humanities Research Board support for museums,
(provided to assist with the cost of maintaining the University's collections)
1.51.5
General income from donations in advance of 800th Campaign1.50.0
Other (including overheads from other University activity)3.02.9
 
 12.514.7
 

Endowment and investment income

35. It is estimated that the unrestricted income from this source will be £10.1m made up as follows:

 £m
Income from Amalgamated Fund4.2
Income on short-term and other investments3.9
Income from managed non-operational property1.4
Other0.6
 
 10.1
 

36. Chest Estimates for 2005-06 assume a distribution from the Amalgamated Fund of 112.8p per unit.

Research grants and contracts

37. Overall direct costs relating to research grants and contracts are budgeted to increase slightly more slowly than last year. The UK Research Councils have agreed that, with effect from 2006, they are prepared to provide funding for new contracts on the basis of 80% of full economic costs. It is expected that this will give a significant improvement in overhead recovery. In recognition of underfunding under the previous arrangements a transitional payment of approximately £10m is expected to contribute to overhead costs in 2005-06. The enhanced costing information associated with the FEC programme will provide further support in achieving improved recovery of indirect costs from industrial and other sponsors, in line with the Finance Working Party recommendations.

Chest Expenditure

38. Expenditure is estimated to rise by £18.1m (7.2%) over the Forecast for 2004-05.

College fee transfer

39. The College fee transfer has been estimated in accordance with the Terms of Agreement between the University and Colleges regarding College fees, with a separate sum for Homerton College. The calculation of the transfer is with reference to elements in HEFCE funding; the change in the QR formula has led to a significant increase in the projected transfer for 2005-06, and the implications of this are under discussion with the Colleges. The Agreement is scheduled to be renegotiated for 2006-07.

40. In addition to the expenditure from the University's own general funds, refurbishment of premises and replacement, renewal, and upgrading of equipment will continue to be funded by special HEFCE grants intended to contribute to the long-term financial sustainability of an institution's physical and research infrastructure (including equipment). The HEFCE has recently announced, subject to conditions, a capital allocation to the University of £77.6m over the period 2006-08.

Funding priorities for 2005-06

41. The financial constraints are considerable, but the Council recommend that the budget makes available priority additional funding.

42. £4.9m will be made available to cover estimated costs of implementation of the forthcoming proposals for salary restructuring. In addition, £1.1m has been budgeted for promotions and regradings for all categories of staff.

43. The contribution made to the Cambridge Commonwealth, Overseas, and European Trusts is maintained at the current level of approximately £3.0m. The Council consider that support for overseas students by these Trusts is an important factor in recruiting the best students.

44. Additional recurrent funding will be made available to cover utilities costs which will increase by £1.0m more than originally predicted following expiry of a fixed contract for supply.

45. The Council believe that it is essential to invest in the necessary central information systems. The Council welcome the progress which has been made in the last four years in project direction and management. The project to introduce the new student record system, CamSIS, is well underway, with successful implementation of key elements of Phase I in October 2004 and £1.8m included for expenditure on Phase 2 in 2005-06. Budget provision is being made for a new human resources and payroll system (CHRIS) with £2.4m included for 2005-06. CamSIS is a joint venture between the Colleges and the University, and discussions about the respective contributions are in progress.

46. The future financial position of the University will be determined in large part by the opportunities for significant cost savings or additional income generation through staff restructuring by early retirements and redundancies and positioning for the next RAE. A provision of £2.0m has been made to facilitate restructuring.

47. The Council consider the maintenance of the estate to be a high priority and note that the quality of the estate is ranked second in the UK higher education sector. The allocation for long-term maintenance has been set at £15.3m, with further elements of maintenance and refurbishment funded by HEFCE Project Capital and SRIF funding. The level of backlog maintenance is being monitored closely. An allocation of £2.0m is made for minor works, including provision for improving disabled access. This combination of funding sources should help to maintain the estate in good condition.

48. An allocation for equipment is budgeted at £2.5m as many items of equipment cannot be obtained from SRIF or other non-university sources, and further reduction of the fund would create problems in teaching, safety, and IT infrastructure.

49. Other non-recurrent sums totalling £1.6m have been set aside for known commitments.

50. Efforts in the University to raise awareness and to encourage better space usage, so as to reduce premises running costs, optimize new building projects, and create opportunities for property disposals, are bearing fruit.

Major capital works

51. The main areas for new building are at West Cambridge, the Sidgwick Avenue Site, and Addenbrooke's. At West Cambridge, the Residences and Nursery (£23m) have been recently completed and the Centre for Advanced Photonics (CAPE) (£14.4m) will be finished late in 2005. At the Sidgwick Avenue Site, buildings for Criminology (£13.2m) and English (£15.2m) were completed in 2004-05. The University's biggest project - the Hutchison/CR-UK Research Facility (£44m) at Addenbrooke's - is well advanced with completion expected at the end of 2005. During the year, a total of 19,300 m2 of built space will be added to the estate, an increase of just under 3%.

52. The focus of the capital programme is shifting from new building towards refurbishment/replacement of existing facilities especially on the central city centre sites; e.g. the Systems Biology Institute (£10m), Physiology (£3.7m), and the Leverhulme Centre for Human and Evolutionary Studies (£5.4m) as part of the SRIF-2 Government-funded programme. This increased emphasis on refurbishment will continue in the SRIF-3 programme due on site from April 2006.

53. The projection of approved expenditure on capital building projects is attached as Table 2 of this Report. The expenditure profile is distorted by the one-off payment for CIDEM in 2006-07.

54. Environmental considerations, and in particular the Government's ambitious targets to cut CO2 emissions from buildings are having a major impact. All significant new building development is now required to be designed from the outset to achieve the highest sustainability standards (BREEAM excellent rating) if this is practicable. Particular emphasis is given to energy and water management efficiency as this not only has the greatest environment impact but also reduces the University's premises running costs.

Overall position of the Quinquennial Equalization Fund (QEF)

55. The forecast balance on the QEF at 31 July 2005 is a deficit of £(29.4)m, which after the estimated deficit in 2005-06 will increase to £(39.2)m at 31 July 2006.

Non-chest income and expenditure in 2005-06 and beyond

56. Through the Planning Enquiry, short- and medium-term plans with financial forecasts have been developed by Schools and other institutions covering all sources of income (both Chest and non-Chest) and the expenditure applied against all sources. This shows more transparently than previously the flow of funds.

57. As noted last year, significant balances exist in trust fund spendable balances, donation and special accounts, and in departmental reserves which are available to be utilized, and which have been increasing steadily in recent years. The forecasts show that reserves accumulated from non-Chest activity will be widely used to maintain levels of activity in the short term without drawing on the Chest. School plans give examples of how such funds are being used to meet restructuring costs.

58. As noted above, direct costs incurred in academic Departments on research grants and contracts are now, on the basis of the Planning Enquiry submissions, projected to grow in total slightly slower than previously projected. Because such fluctuations in non-Chest income are roughly balanced by changes in direct expenditure, the financial risk associated with such changes is not as great as for fluctuations in Chest income.

59. Other sources of non-Chest income are all estimated to increase much in line with inflation, except where specific exceptions were included in plans submitted.

Outlook for 2006-07 and beyond

60. Significant changes to the pattern of the University's income are anticipated over the period:

These will provide scope to eliminate the deficit in the short term, as long as expenditure remains under control.

61. Schools and other institutions have projected expenditure for future years, and other expenditure items have been rolled forward to consider the impact on Schools and other institutions.

62. The projections of Chest income and expenditure are:

 EstimateProjectionProjection
 2006-072007-082008-09
 £m£m£m
Chest income278.5294.7310.8
Chest expenditure(279.7)(288.1)(298.6)
 
Surplus/(Deficit)
on Chest
(1.2)+6.6+12.3
 

The main assumptions made in these projections are:

63. Further opportunities for improved income are being explored. A proposal to introduce variable fees for postgraduate programmes has recently been agreed.

64. Further substantial investment in the support for the Development Office in the lead up to the Cambridge 800th Campaign is included in expenditure. The Council anticipate that over time significant incremental benefactions and donations will be raised. Donations generated through the Development Office, the Cambridge Foundation, and directly by Departments support numerous academic developments. They do not in general assist the financial position of the Chest, since donations are typically for specific purposes. However, in the 800th Campaign there will be increased emphasis on generating donations for general purposes or in substitution of existing expenditure, which should make a significant, beneficial impact on the University's finances. Since it is difficult to predict the scale or the timing of donations, a global estimate of £1.5m a year has been included in income projections for 2005-06 and beyond. This is likely to be optimistic for 2005-06 but pessimistic for later years.

Uncertainties

65. Although the projections for the next five years show a considerable improvement in the financial position, these figures must be treated with caution because the income streams are uncertain. Projected additional income for research is dependent on the University's ability to gain funding for research grants and contracts on the basis of full economic cost while simultaneously maintaining or increasing research volume as proposed in School plans. It would be prudent to suppose that, with the advent of FEC, other funding streams in support of research, notably SRIF, will in due course be reduced and that it may therefore be necessary to increase Chest expenditure on core infrastructure. HEFCE funding for teaching continues to decline as a proportion of total income but is nevertheless significant. The HEFCE will change the T-funding model in the next few years and the effect on the block grant is unknown.

66. There is also a need to make good the depletion of the Quinquennial Equalization Fund.

67. The likely future level of employers' contributions to pension funds remains a concern.

68. The changes to support from the HEFCE related to research students described above will need to be considered in the context of the full cost of support for research students and the level of the Composition Fee.

Recommendations

69. The Council recommend:

I. That the revised allocations for 2004-05 referred to in this Report be approved.

II. That allocations from the Chest for the year 2005-06 be as follows:

(a) to the Council for all purposes other than the University Education Fund: £112.6m.

(b) to the General Board for the University Education Fund: £155.6m.

III. That the allocations for 2005-06 be adjusted to take account of any differences between actual and estimated expenditure on pensionable stipends, wages, pensions, national insurance contributions, and other personal emoluments.

IV. That any supplementary HEFCE grants which may be received for special purposes during 2005-06 be allocated by the Council, wholly or in part, either to the General Board for the University Education Fund or to any other purpose consistent with any specification made by the HEFCE, and that the amounts contained in Recommendation II above be adjusted accordingly.

23 May 2005ALISON RICHARD, Vice-ChancellorGEMMA DONALDSONMARTIN REES
 TONY BADGERR. J. DOWLINGG. A. REID
 Z. BARANSKIRUTH KEELINGDAVID SIMON
 RICHARD BARNESD. LOWTHERWES STREETING
 NIGEL BROWND. W. B. MACDONALDJOAN M. WHITEHEAD
 WILLIAM BROWNJAMES MATHESONRICHARD WILSON
 MIKE CLARK 

Appendices to this report are available as PDF files. [PDF, 100Kb]


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Cambridge University Reporter 25 May 2005
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