The COUNCIL begs leave to report to the University as follows:
1. This Allocations Report reviews the financial position of the University and recommends allocations from the Chest1 for the financial year 2007-08.
2. This Report looks primarily at cash inflows and outflows, both Chest and non-Chest, and covers both 'current' income and expenditure (i.e. that which relates to the particular twelve months such as pay costs and general expenses) and that which is of a capital nature for which the benefit will run into the future. Moreover allocations from the Chest include amounts set aside for both current and future spend, such as allocations to the Strategic Planning Reserve Fund and New Buildings Enabling Fund, which may not be spent in the current year but are to make provision to fund future strategic initiatives. Major capital expenditure from funds built up for the purpose, or other planned spend from departmental and other reserves, can in any one year give a distorted picture of the overall position.
3. The financial statements published by the University account for 'current' income and expenditure through the income and expenditure account, and bring in the cost of capital expenditure as a depreciation charge over the useful economic life of the asset purchased. Where capital expenditure is funded by capital grants this is shown in the University's balance sheet. It is anticipated that for each of the years covered by this Report the University's income and expenditure accounts will be close to break-even or show a small surplus.
4. Much of the input to this Report is built up from detailed projections provided by Schools and other institutions as part of the Planning Round. Information on other income and expenditure has been collected in a parallel exercise. The collection of projected income and expenditure includes both Chest and non-Chest positions: non-Chest income is increasingly important as it contains elements, such as reserves, which can be used in the short term to provide flexibility and an element of strategic independence to Schools and other institutions. There is also an increasingly complex set of links between non-Chest and Chest income: for example, elements in the HEFCE grant supplement research grant income funded by particular types of sponsor.
5. The submission of plans and forecasts was again followed by individual meetings early in the New Year between the Chairman of the Council of each School and the Pro-Vice-Chancellor (Planning and Resources). Similar meetings were held with the Heads of institutions outside the Schools. These meetings are a key feature of the annual round and are the starting point for deciding allocations for the next year. Analysis and consolidation of plans and forecasts is expected to identify a range of issues for review with institutions, both to understand how their plans are developing and to ensure consistency of approach where consistency is needed.
6. The Planning Round is not just about finances; it provides an opportunity for the Schools and other institutions to set out their priorities and for the Planning and Resources Committee and the General Board to assess the overall pattern.
7. Undergraduate numbers have remained broadly stable while postgraduate numbers have increased slightly (see Appendix 1(A)). The student number plans submitted as part of the exercise described in 4 above together show continuation of modest growth in postgraduate numbers.
8. Trends in staff numbers (Appendix 1(B)) indicate that the number of established academic staff has remained stable over the past five years while the number of academic-related staff has increased by nearly 50%. The Council and the Planning and Resources Committee have requested further analysis of these data. A preliminary analysis shows that additional computer officers account for approximately half the increase. The increase in computing staff and other administrative staff appears to be distributed equally between academic departments and central support services (including the Unified Administrative Service, the Computing Service, the University Library, and other staff and student services). A more detailed analysis of these trends will be undertaken.
9. The Council reported in June 2006 (Reporter, 2005-06, p. 671) that it estimated that the total income for the year 2006-07 would be £614.9m, of which £285.4m would be Chest income and £329.5m would be non-Chest, or restricted income. The overall position was expected, after a transfer from reserves of £3.0m, to be a deficit of £(0.8)m on the Chest. On the same basis, the latest forecast is for a Chest deficit of £9.5m. The main changes compared to the original Estimate are summarized in Appendix 2. The most significant element is the lower than expected contribution to indirect costs from the introduction of full Economic Costing (fEC) because the roll-out under the new system of research grants from the Research Councils was slower than had been predicted.
10. Last year's Allocations Report projected a Chest surplus of £2.0m for 2007-08.
11. The latest projections of Chest income may be summarized as follows:
| Latest Estimate 2007-08 | Last year's Estimate 2007-08 | |
| £m | £m | |
| HEFCE/TDA grant | 180.1 | 179.4 |
| Academic fees and support grants | 67.0 | 68.3 |
| Other operating income | 13.9 | 11.8 |
| Endowment and investment income | 13.2 | 11.7 |
| Research grants and contracts | 30.8 | 39.6 |
| Overheads on other services rendered | 1.0 | 1.4 |
| 306.0 | 312.2 |
showing that the delayed phasing in of fEC grants has to some extent been offset by increased interest on endowments and an increased contribution from Cambridge Assessment.
12. As indicated above, it is clear now that while the introduction of the procedures to deal with fEC preoccupied both universities and Research Councils, the initial assumptions of the speed at which the Research Councils would be able to start delivering grants with enhanced indirect costs through the system were over-optimistic. This has caused the Research Councils some difficulty at national level. The University now has more experience of the operation of the new-style grants, and this year's revised forecasts show a delayed profile of increased indirect cost recovery, reaching previously predicted levels only in 2009-10.
13. Overall HEFCE grant for 2007-08 is very close to what was previously predicted. Within the overall total, however, there has been significant movement.
14. Within the teaching element, HEFCE has set aside funds to support 'very high cost and vulnerable science subjects': chemistry, physics, chemical engineering, and mineral, metallurgy, and materials engineering; the national objective is to maintain capacity while demand from students grows. For Cambridge the provisional allocation is £1.1m; this contributes to an increase in total teaching funds from HEFCE of 4.6%.
15. Within the QR element of HEFCE funding for research, a sum has been identified to support business-related research, which has been allocated on an average of 2003-04 and 2004-05 'Research income from UK industry, commerce and public corporations', taken from the HESA Finance Return. QR Charity support funding (or 'partnership funding') is calculated in proportion to home and overseas charity income subject to various eligibility rules. The gearing is approximately 30% (25% in 2006-07) of reported qualifying income. Taking all the changes into account, Cambridge has received a 7.1% increase in total research funding.
16. As full details of funds from the Training and Development Agency for Schools (TDA) have not yet been announced, stable funding has been assumed.
17. The estimated income from academic fees is based on levels already Graced, which in most cases reflect increases in line with inflation and advice or instructions from the Government and Research Councils. The slight drop reflects an improvement in the method of calculation.
18. The estimated unrestricted income from Endowment and investment income is made up as follows:
| Estimate 2007-08 | Estimate 2006-07 | Revised Estimate 2006-07 | |
| £m | £m | £m | |
| Income from CU Endowment Fund | 4.7 | 4.4 | 4.4 |
| Income on short-term and other investments | 6.6 | 4.5 | 6.6 |
| Income from managed non-operational property | 1.4 | 1.6 | 1.6 |
| Other | 0.5 | 0.8 | 0.4 |
| 13.2 | 11.3 | 13.0 |
19. Chest Estimates for 2007-08 assume a distribution from the CU Endowment Fund of 126.0p per unit.
20. The projected other operating income is made up as follows.
| Estimate 2007-08 | Estimate 2006-07 | Revised Estimate 2006-07 | |
| Transfer from Cambridge Assessment | 5.5 | 3.3 | 6.9 |
| Refund of VAT (recurrent) | 2.9 | 3.0 | 2.9 |
| Arts and Humanities Research Council support for museums2 | 1.7 | 1.7 | 1.7 |
| General income from donations | 0.7 | 0.6 | 0.5 |
| Other (including overheads from other University activity) | 3.1 | 2.6 | 2.9 |
| 13.9 | 11.2 | 14.9 |
21. In this year's Planning Round, initial projections of Chest expenditure were in total some £19m higher than predicted last year. Under the supervision of the Resource Management Committee much detailed analysis and revision has been undertaken, concentrating initially on 2007-08. As a consequence projected expenditure has been substantially reduced, and the current draft projection for the Chest for 2007-08 is a deficit of £1.4m.
22. Projections of non-Chest income are subject to potential fluctuations, but as these 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. The currently projected outcome for 2007-08 shows a deficit of £4.4m compared to the £9.2m surplus projected for 2007-08 last year. There has been considerable detailed change from the estimate made last year, reflecting more up-to-date information, reclassification of expenditure, and reconsidered plans. These include more conservative assumptions about donations and their phasing, income from trading activity, and non-Chest fee income. On the expenditure side there is significant planned expenditure from a designated reserve (for a replacement telecommunications system), and the adoption of a general policy of spending reserves accumulated in previous years, a policy which the Planning and Resources Committee have encouraged.
23. It should be noted that while the latest estimate of direct expenditure on research grants and contracts is £5.0m lower than previously forecast, this more cautious estimate of volume has no direct implication for the deficit.
24. The financial constraints are considerable, but the Council recommends that the budget makes available priority additional funding.
25. Allocations have been adjusted to cover the costs of implementation of the salary restructuring exercise for Chest-funded staff. A non-recurrent sum was set aside last year to assist with the transition to the new pay arrangements for non-Chest activities.
26. £1.1m has been budgeted for short-term transitional costs of promotions and regradings for all categories of staff.
27. In order to reduce perceptions that charity-funded research contracts are less attractive to departments, £1.1m has been set aside to enable the payment to Schools of a share of the extra HEFCE research grant that corresponds to income from charity-funded research (and in that sense represents a contribution towards the indirect costs that charities are reluctant to pay).
28. Additional recurrent funding will be made available to cover utilities costs which have increased by a further £0.9m above previous predictions following continued upward pressure on prices prior to letting gas and electricity utilities contracts in September 2006.
29. The Council considers the maintenance of the estate to be a high priority and notes that the quality of the estate is ranked second in the Russell Group. The allocation for long-term maintenance has been set at £16.3m, with further elements of maintenance and refurbishment funded by HEFCE Project Capital and Science Research Investment Fund (SRIF) funding. The level of backlog maintenance is being monitored closely and is reducing. An allocation of £1.0m is made for minor works. This combination of funding sources will help to maintain the estate in good condition.
30. A Chest allocation for equipment is budgeted at £1.7m. This very modest allocation is supplemented again this year by an additional HEFCE grant in respect of capital support for research amounting to £3.3m, which is being earmarked for equipment. Further funds for equipment are available from SRIF and other non-Chest sources, bringing the total available funds for equipment to around £20m.
31. In the light of experience, as a budgetary provision towards improving forward planning for University-wide Information Technology and Systems developments, a sum of £1.9m has been set aside in 2007-08.
32. As the budget has been built up from detailed submissions, it is possible to provide the broad overview given in the first column (labelled 'Chest') in Table 1. It is customary to divide the allocations between the General Board and the Council in respect of the institutions under their supervision, representing the University Education Fund and the remainder. On the basis of the detailed submissions, the University Education Fund should be £174.7m, and the remainder £132.7m. The ratio between the two (57:43) remains the same as for the past two years.
33. It was clear from the work done on expenditure predictions for 2007-08 that a similar review of expenditure projections for the following years was necessary, and this is in hand under the guidance of the Pro-Vice-Chancellor (Planning and Resources). For the purposes of this Report, global adjustments have been made, which imply a continuation in general terms of the approach applied for 2007-08, but allowing some scope for increasing expenditure. On this basis it is anticipated that the previously envisaged trajectory of Chest surpluses should be resumed by 2009-10.
34. There will be further as yet unquantified costs arising from harmonization of conditions of service. The 2008 actuarial valuation of the Universities Superannuation Scheme (USS) may lead to adverse changes in pension costs, a matter which remains of concern to the Council.
35. The following significant changes to the pattern of the University's income are anticipated over the period:
36. The main assumptions made in these projections are:
37. The 800th Campaign has an important role to play in supporting operational priorities but has limited impact on the Chest budget in the short term. The Campaign has, to date, raised the endowment funds of the University by about £125m but the large majority of the resulting income supports important new academic activity, thus increasing the capacity of the University and advancing its competitive position. Where donors have contributed (or formally agreed to contribute) to the costs of posts that would otherwise fall on the Chest, Schools have incorporated the resulting savings into their financial plans, but the impact of potential future donations of this type has not been included in projections of Chest income.
38. The projections for the next five years show a considerable improvement in the financial position, achieved through maintaining pressure on expenditure. While that seems reasonable on the basis of current patterns of actual expenditure, there may come a point at which continuing pressure may cause unacceptable harm to the University's core activities.
39. Pay settlements are subject to national negotiation. For planning purposes, after recently agreed pay settlements, increases in overall pay costs of 3% a year have been allowed for. The University has an ambition to improve staff pay, but each 1% rise in salary adds approaching £2m to Chest expenditure and significant increases are therefore dependent on the University's ability to generate operating surpluses. Until then, there is a continuing trade-off between increasing pay levels and maintaining current staff numbers.
40. The Chest income projections towards the end of the period could be affected by anticipated changes to the systems for the calculation of HEFCE grants for both teaching and research. The HEFCE research element will also be affected by the outcome of the forthcoming Research Assessment Exercise. The likely changes to the calculation of the Teaching element also carry a risk for a stream of funds from HEFCE that contributes to the College Fee Transfer.
41. The Time Allocation Survey for academic staff is becoming increasingly important, as the results for research time are a key input to the indirect costs of research contracts under the fEC regime. While the teaching time has no direct impact on any income stream, a similar cost by subject area will in future have to be reported by all universities to HEFCE and may inform future funding levels for teaching.
42. Projected additional income associated with 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.
43. Modest sums have been set aside in 2008-09 and 2009-10 to support capital expenditure in support of research, although it is hoped that SRIF funding will continue throughout that period at roughly the current level. Beyond 2010, however, there is no guarantee that SRIF funding will continue at the same level, and capital expenditure at the current rate will depend on the generation of significant Chest surpluses from the operating budget.
44. The Finance Committee have considered the variety and potential magnitude of uncertainties, particularly in relation to the recovery of indirect costs on Research Council funded contracts, and consider that the proposed level of Chest allocation is appropriate.
45. The Council recognizes the complexity of the current financial position and believes that at present the levels of risk are acceptable. It will continue to monitor developments carefully through the Finance Committee and the Planning and Resources Committee.
46. Although rarely funded from allocations, it is customary to include in this Report a brief overview of the capital building programme.
47. During the past decade the University has embarked on a significant programme of new buildings and refurbishments funded largely by HEFCE SRIF funding and in collaboration with major donors.
48. Investment priorities do however have to be modified in the face of events. New opportunities arising from the 800th Campaign (e.g. the Kavli Institute for astronomy and the Sainsbury Laboratory for plant sciences) have created an imperative for investment contributions by the University. Recruitments, which have been significant ahead of the deadline for the Research Assessment Exercise often require significant capital and recurrent investment, creating short-term uncertainties in investment priorities.
49. Significant effort continues to be devoted to developing a programme for refurbishment of both research and teaching facilities, for which much of the funding has in recent years come through HEFCE special grants (particularly SRIF). HEFCE is adopting from 2008 a new framework for capital investment for higher education institutions, and has not yet indicated the likely levels of support.
50. The Council recommends:
I. That the revised allocations for 2006-07 referred to in this Report be approved.
II. That allocations from the Chest for the year 2007-08 be as follows:
| (a) to the Council for all purposes other than the University Education Fund: £132.7m. |
| (b) to the General Board for the University Education Fund: £174.7m. |
III. That any supplementary HEFCE grants which may be received for special purposes during 2007-08 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.
| 29 May 2007 | ALISON RICHARD, Vice-Chancellor | BOB DOWLING | G. A. REID | Z. BARANSKI | M. FERGUSON | DAVID SIMON | NIGEL BROWN | M. K. B. KEMPLE | VERONICA SUTHERLAND | WILLIAM BROWN | DEBBIE LOWTHER | RICHARD WILSON | M. CLARK | D. W. B. MACDONALD | S. J. YOUNG | S. J. COWLEY |
The appendices to this Report are available as a PDF file:
1 Chest income consists of funding council grants, Home and Overseas fees, endowment income, a share of research grant overheads, transfers from CUP and Cambridge Assessment, and certain other operating income. Non-Chest income consists of income from trust funds, special funds, the direct cost element of research grants and contracts, and departmental share of overheads, self-supporting accounts, services rendered, and residences and catering.
2 Provided to assist with the cost of maintaining the University's collections.