The COUNCIL begs leave to report to the University as follows:
1. This Budget Report reviews the financial position of the University and recommends allocations from the Chest for the financial year 2008-09.
2. The Council's Annual Report (Reporter, 2007-08 p. 303)1 described how this Report proposing allocations from the University Chest is being progressively developed to form a full budget document for the 'teaching and research' University, that is the University excluding Cambridge University Press and Cambridge Assessment (except to the extent that transfers are made to the University from these entities). This year's Report represents a further stage in that process, with the inclusion of a bridge between the traditional 'Allocations Report' presentation, prepared on a funds accounting basis, and the format of the financial statements of the University.
3. The recommendations of this Report relate to allocations from the Chest to Schools, central academic and administrative service institutions, and central and administered funds. However the non-Chest part of the University's operating budget is increasingly important as it contains elements, such as reserves, which can be used in the short term to provide flexibility and a degree of strategic independence in financial management to Schools and other institutions. There is 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.
4. The Council reported in May 2007 (Reporter, 2006-07, p. 716) that it estimated that the total income for the year 2007-08 would be £620.3m, of which £306.0m would be Chest income and £314.3m would be non-Chest income. The overall position on the Chest was expected to be a deficit on the Chest of £(1.4)m. On the same basis, the latest forecast is for the Chest to be close to balance, although there have been both positive and negative changes, which are summarized in Appendix 1. The most significant negative element is, as last year, slower than expected phasing in of contribution from the Research Councils to indirect costs from the introduction of full Economic Costing (fEC) of research grants. In the favourable direction, the contribution due to be transferred from Cambridge Assessment under regular arrangements is likely to be £4.0m higher than originally budgeted, since Cambridge Assessment's activity is currently running at an increased surplus. In addition, the forecast of academic fees is increased by £2.4m on the basis of the latest reports on student population, including the phasing in of the higher level of fees for Home/EU undergraduates. Finally there was an adjustment to the Clinical School baseline allocation agreed after last year's Report was prepared which reduced the need for Chest allocation by £1.0m.
5. The non-Chest component of the University is forecast to be in surplus in 2007-08. In aggregate the 'teaching and research' University is expected to show a small surplus for the year on a current income and expenditure basis.
Budget decisions are influenced by the overall strategy of the University. The Council is continuing the process of consideration of strategic directions for the University, described in its Annual Report (http://www.admin.cam.ac.uk/reporter/2007-08/weekly/6094/1.html) with green papers published at http://www.admin.cam.ac.uk/cam-only/committee/council/directions/. Planning direction and decisions are made with reference to the agreed statement of the University's mission and core values (http://www.admin.cam.ac.uk/reporter/2001-02/weekly/5863/4.html).2
6. The current financial management challenge of the University is to accommodate the impact on staff costs of the recent pay and grading exercise and pay settlement, to build in funds for central strategic initiatives, as well as provide for strategic spend within Schools, to build up recovery of the indirect costs of research, and to provide for future capital expenditure on physical infrastructure.
7. Financial planning in the past three years has been complicated by two issues: the Research Assessment Exercise (RAE) and the implementation of the new pay and grading policy. The former required investment to ensure maximum competitiveness, while the latter imposed additional salary costs that were difficult to predict accurately, particularly at the level of individual institutions. The RAE census date has passed and the large majority of cost increases associated with pay and grading are known. The planning guidance consequently set budgeting constraints for each institution that were tight but, in the view of the Planning and Resources Committee, manageable, while at the same time leaving incentives in place to increase income and constrain expenditure.
8. Much of the input to this Report is built up from detailed projections provided by Schools and other institutions as part of the 2007 Planning Round. Information on other income and expenditure has been collected in a parallel exercise. The Planning Round captures projected income and expenditure in both the Chest and non-Chest positions.
9. As usual, the submission of plans and forecasts was followed by analysis, consolidation, and review in individual meetings. In general it has been possible for Schools and institutions to budget for expenditure for 2008-09 close to the previously forecast levels, however some modest extra expenditure was recognized to be necessary for academic initiatives, services, and information systems. Further analysis and discussions will take place this term about projections for the subsequent years to confirm the academic and financial aspects of the plans beyond 2008-09.
10. The Planning Round continues to provide 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, and thereby contribute to the development of overall strategy.
11. In January (Reporter, 2007-08, p. 430; http://www.admin.cam.ac.uk/reporter/current/weekly/6099/4.html) the Council agreed that in future Allocations (now Budget) Reports the staff statistics, and total expenditure patterns will be set out in a new way, and any notable changes will be explained. Appendix 2 sets out the latest position on actual staff numbers, showing comparisons with the preceding six years on the new basis:3 as was expected, this shows a growth in academic staff numbers corresponding to the RAE census date. Research staff numbers continue to increase. The numbers of assistant staff have also increased, but represent a slightly reduced proportion of the total.
12. Projections for the planning period show no major changes, except for the School of Clinical Medicine which plans for continuing expansion, but, as indicated above, medium-term plans remain subject to further discussion.
13. The main publication of student statistics occurs through the special Reporter supplements for Student Numbers and Undergraduate Statistics of Applications and Acceptances, together with the Annual Report of the Board of Graduate Studies. However it is customary in this Report to include a statement of the latest position on full-time fee-paying student numbers, which is set out in the usual form in Appendix 3, showing comparisons with the preceding six years.
14. Undergraduate numbers show an unplanned decrease during the past three years. Although this is partly compensated by increasing numbers of Erasmus students,4 who pay no fees and are not recorded here, the Council notes that this trend should be reversed as admissions are expected to increase in 2008-09.
15. Over the period, postgraduate numbers have increased slightly, with a temporary bulge in 2005-06 and 2006-07 because of changes in record-keeping as described in the footnote to the Appendix. Figures for 2007-08 are provisional. The student number plans submitted in the 2007 Planning Round together show continuation of modest growth in postgraduate numbers.
16. In view of the importance of research income (both research grants and contracts and from HEFCE in QR and other funding) it is appropriate to comment here on the volume of research grants and contracts and the contribution they make to the University's indirect costs.
17. Measured by direct costs, research grants and contracts have been growing over the past four years by around 6% a year - real growth of perhaps 2% above inflation.
18. This correlates reasonably well with the research staff numbers in Appendix 2. School plans suggest a similar rate of growth going forward.
19. The time needed to phase in fully grants and contracts under the new Full Economic Cost regime is now expected to be closer to five years than the three originally anticipated. In 2007-08, the proportion of forecast expenditure costed under the new regime is about 38%; by 2011-12 virtually all grants and contracts should be costed under the new regime. On the basis of the current volume it is now possible to make more robust estimates of the likely outcome of the switch to the new regime; current estimates are that the contribution to indirect costs (including department shares) will have risen from about £29m in 2006-07 to over £60m in 2011-12, of which a proportion will be needed for capital funding (see below).
20. Although UK and other charities are generally reluctant to meet indirect costs, acceptance of research funding from them potentially leads to an increased stream of HEFCE income (so-called Partnership funding) to support research - in 2008-09 representing approximately 30% of qualifying income generated in previous years.
21. In keeping with the new presentation of staff numbers, the Council agreed to show the changing patterns of total expenditure from both Chest and non-Chest sources in the table below.
22. This shows a fairly stable pattern of expenditure in academic institutions as a proportion of total expenditure. Given the inclusion in the other institutions and activities line of ad hoc and project expenditure, a certain amount of variation from year to year would be expected.
| Expenditure | ||||
| 2003-04 | 2004-05 | 2005-06 | 2006-07 | |
| Schools and other academic institutions5 | £347.6m | £364.7m | £381.9m | £406.6m |
| 68.2% | 69.7% | 68.6% | 67.9% | |
| Other institutions and activities6 | £162.0m | £158.2m | £174.7m | £192.3m |
| 31.8% | 30.3% | 31.4% | 32.1% | |
| Total expenditure7 | £509.6m | £522.9m | £556.6m | £598.9m |
23. Income for 2008-09 is projected to be higher than projected at this point last year for both Chest and non-Chest.
24. As far as the Chest is concerned, HEFCE income is £1.9m below what had been anticipated, principally as a consequence of the government decision to cease funding many students taking equivalent or lower qualifications,8 and to a lesser extent through QR derived from lower than anticipated volume of charity-funded research.
25. The latest information on student numbers and mix gives an increase in projected income from composition fees (£3.8m). In addition Cambridge Assessment expects to make an exceptional transfer over and above its regular transfer to the University, subject to full review by the Syndicate of its reserves requirements.
26. However as in the current year, the increased recovery of indirect costs of research is still not at the level originally forecast, and there is a reduced forecast for interest income.
27. Taken together these enable the plans of Schools and other institutions to be funded by allocations from the Chest as discussed during the Planning Round, investment in estate condition and in business support systems to be maintained, and allocation of £13m for strategic purposes,9 while still projecting a small Chest surplus for 2008-09, as set out in Table 1 (p. 800).
28. The Operating Budget is developed and managed on a fund accounting basis. The University's Financial Statements are prepared on a financial accounting basis consistent with generally accepted accounting principles. A number of adjustments are needed to convert the Operating Budget format to the Income and Expenditure account format seen in the University's Financial Statements. The main adjustments are to remove capital expenditure from the Operating Budget and bring in a depreciation charge, and to estimate the amount of spend against reserves and build-up of reserves. The estimated Income and Expenditure account resulting from the Operating Budget for 2008-09 is shown in Table 3 (p. 802).
29. While the primary driver of forward planning is the academic and research programme of the University, it is necessary to consider carefully the costs of providing an effective set of buildings to support it.
30. The condition of the University Estate is assessed by a rolling programme of inspection by external assessors. The programme covers the entire Estate in five years and, at the end of the first five-year period for which comparable data is available, the programme has resulted in a continuous improvement in the condition of the Estate and an acceptable level of backlog maintenance. On the basis of these data, and on the recommendation of the Buildings Committee, the Council considers that the current level of the maintenance budget, adjusted for inflation, is appropriate.
31. Capital expenditure continues at a relatively high level, funded almost entirely from HEFCE infrastructure funding (SRIF3 and PC4, 2006-08 and CIF from 2008) and external donations. The table below shows projects in progress, together with the main sources of funding.
32. The Capital Programme over the past ten years has provided new buildings and new facilities at West Cambridge, the Sidgwick Site, the Addenbrooke's Site, (Cambridge Biomedical Campus), Tennis Court Road (the old Addenbrooke's Site), and at Lensfield Road (the Department of Chemistry), all consistent with the Estate Plan. It has been possible to achieve these developments as individual projects as appropriate funds have become available. The same opportunistic approach cannot be used to redevelop other central sites. Much of the accommodation at the Old Press Site and New Museums Site is in poor condition and these sites are in urgent need of redevelopment. Consultation with Schools and other institutions has established that the Old Press Site is not required for operational purposes in the foreseeable future, provided acceptable replacement accommodation can be found for the Departments and institutions currently located there, including parts of the Unified Administrative Service (UAS). Options for the redevelopment of the site are being investigated in collaboration with the City Council and other stakeholders. Current expectations are that the New Museums Site will be redeveloped to provide new or refurbished accommodation for Departments in the School of Humanities and Social Sciences, for the Department of Geography, and for elements of the UAS and Staff and Student Services. These proposals are in the consultation phase but will require the transfer of the Departments of Materials Science and Metallurgy and Chemical Engineering and Biotechnology to new accommodation in West Cambridge. The costs of the redevelopments have yet to be calculated but, if progressed, they will form an integrated capital programme during the next six years and will inevitably be the focus of significant capital expenditure.
Projects | Approx. cost £000 | Source of funds | Predicted construction dates |
| Physics of Medicine | 12,500 | HEFCE SRIF 3 | May 07 - Jun 08 |
| Sainsbury Laboratory | 89,900 | Gatsby Trust HEFCE CIF |
Sept 08 - Oct 10 |
| Botany Building | 4,700 | HEFCE CIF | Nov 07 - Oct 08 |
| University Library West Bookstacks Phase 6 | 7,000 | HEFCE CIF University Library |
Nov 08 - Apr 10 |
| Hauser Forum | 12,145 | Hauser-Raspe Foundation University | Jun 08 - Aug 09 |
| Cambridge Centre for Imaging | 11,010 | HEFCE SRIF 3 British Heart Foundation Medical Research Council University |
Apr 07 - May 08 |
| Institute of Manufacturing | 15,090 | HEFCE SRIF 3 Gatsby Foundation Dr Alan Reece University |
Jan 08 - Mar 09 |
| Kavli Institute of Cosmology | 4,085 | HEFCE SRIF 3 University |
Mar 08 - Mar 09 |
33. A strategic project of great importance to the future of the University is that associated with the development of land at North West Cambridge, about which the Council has recently published a Report (Reporter, 20007-08 p. 613; http://www.admin.cam.ac.uk/reporter/current/weekly/6107/23.html).
34. The main purpose of the development is to construct affordable accommodation for University staff and students and to provide opportunities for new academic developments in the future. In developing the site the University will seek to generate a positive financial return within the context of the overall academic and other strategic objectives for the site.
35. Projections beyond 2008-09 have also been built up from detailed projections, but start from assumptions made a year ago in preparation for the 2007 Planning Round. These projections are therefore preliminary and will be subjected to further examination during 2008 to inform future Planning Rounds.
36. Tuition fee income beyond 2008-09 continues to show a modest increase above previous forecasts, based on projections of student mix and the latest fee structures. However the negative factors noted for 2008-09 continue forward. Taken together, these changes are small in relation to the overall budget, but nevertheless reduce previous estimates of Chest income in 2010-11 by some £3m. An estimated further special transfer from Cambridge Assessment is provisionally included in 2011-12, but will be dependent on Cambridge Assessment's operations continuing satisfactorily and without unforeseen capital requirements.
37. The Council notes that the introduction of devolved budgeting has led to prudent patterns of expenditure and the establishment of reserves at School and Department level. This is a factor in supporting the stable operation of the University, and will also help to allow the University to deal with fluctuations in income and expenditure. Nevertheless, the Comprehensive Spending Review is explicit in its expectation that efficiency savings will be made in the Higher Education sector amounting to some £500m in total, and further work will therefore be needed to improve cost effectiveness, in particular through procurement/purchasing processes.
38. The preliminary projections given in Table 2 (p. 801) indicate that the Chest budget will be in small surplus in each year to 2011-12, as will the University overall. This provides some limited flexibility to deal with future uncertainties, and in particular potential increases in pay costs. The projected surpluses are, however, achieved only by making relatively modest allocations for capital expenditure and strategic initiatives.
39. The projections take account of anticipated donations and their planned expenditure, and those in the museums explain some of the apparent unusual year-on-year movements in relation to academic institutions and services.
40. The principal source of unrestricted funds for capital expenditure during the past ten years has been provided by the Funding Council in the form of infrastructure funding (SRIF and PC funds). The University has been awarded £115.0m from HEFCE CIF (Capital Infrastructure Funds, which replace SRIF and PC) to cover the period 2008-11. This, in combination with other sources of funds, should allow capital expenditure to continue at the current rate. An income stream earmarked for capital expenditure is expected to continue beyond 2011-12, but the level is unknown and the relative contributions to teaching and research infrastructures are uncertain. Allocations are therefore proposed (see table below) for capital replacement and strategic initiatives but at a level that may prove inadequate beyond 2011.
41. Table 2 shows an income stream that is almost entirely non-Chest: 'other services rendered'. This covers trading and similar activity, mainly carried out at departmental level. It has grown as a proportion of the overall budget in recent years and represents activity that makes use of the core infrastructure of the University, yet the contribution of these activities to Chest income is small. This matter was considered by the working party set up by the Planning and Resources Committee in May 2002 which concluded that an 'overhead' charge should be made when salaries are met from such funds. It is apparent that this policy has had little impact and will need to be reviewed.
42. Projections of Chest income and expenditure, and of the overall financial position of the University, over the next five years remain exposed to a number of uncertainties that were highlighted in the 2007 Report, and in addition the general economic situation has deteriorated.
2008-09 | 2009-10 | 2010-11 | 2011-12
| |
| Potential Capital Expenditure | £5m | £4m | £5m | £10m |
| New Buildings Enabling Fund | £1m | £2m | £1m | £2m |
| Strategic Planning Reserve Fund | £7m | £1m | £2m | £4m |
£13m | £7m | £8m | £16m |
'Other Administered Funds' includes elements for minor works, maintenance, and equipment.
43. The agreed pay increase in October 2008 is based on the RPI and is likely to be higher than the figure of 2.5% used for planning purposes. The level of pay settlements beyond 2008 is unknown.
44. The HEFCE funding model for teaching is expected to change, but it is assumed that the level of funding delivered to the University will be stable over the next four years. The consequences on the HEFCE grant of the outcome of the RAE are impossible to predict, but the increased number of staff submitted compared with 2001 (increased by 16%) give reasonable grounds to assume that it will be at least maintained.
45. The cost of providing pensions is a particular concern. The Universities Superannuation Scheme (USS) will be subject to a triennial actuarial review as at 31 March 2008. Its assets will be affected by the world financial conditions, and the valuation of liabilities is likely to increase in response to government guidance on estimations of mortality rates and pay increases across the sector. Each 1% addition to the employer contribution rate would add about £2m to Chest budget expenditure.
46. Significant contributions to the University's income come through the Research Councils in the contribution to indirect costs and support of research students. Because of wider budgetary issues, some of them may not be able to fund the level of activity to which the sector has become accustomed. As a consequence, the University will need to compete more effectively for such funds. This is a significant academic risk, but in financial terms is one that would be spread over a number of years, and so should be containable.
47. The trend has been for staff numbers to increase; changes in retirement age policy are likely to contribute to the continuation of this trend. It is important that employment decisions, particularly with respect to employment beyond normal retirement age, genuinely reflect the needs of the University.
48. It would be wise to accumulate funds for capital expenditure from the Chest especially towards the end of the planning period, given the uncertainties beyond the currently announced Capital Infrastructure Fund.
49. The University faces increasing international competition in recruiting the best students and needs to provide greater bursary support both for undergraduates and postgraduates. While no specific increase is currently envisaged, this represents a potential call on Strategic funds.
50. Given the uncertainties described above, it is prudent to budget for a modest surplus, so that there is some scope to deal in a measured way with bad news when it happens.
51. As is demonstrated in this Report, providing an overall picture of the likely financial position requires better understanding of all potential sources of income, including the less predictable sources such as Cambridge Assessment and Cambridge University Press.
52. Generating new income is not straightforward. To put this in context, an additional 1,000 overseas undergraduate students would provide less than £10m a year at current fee rates, taking no account of the additional student support that would be required. Over the five years to July 2008, Cambridge Assessment will have transferred approximately £45m to the University's operating budget. The Press is making progress in a challenging trading environment to enable it to resume material transfers in support of the University's teaching and research activities.
53. The main aims of the 800th Campaign are to improve student support and to increase the capacity of Collegiate Cambridge to deliver its core missions of teaching and research. The benefits are long term and cannot be expected to affect the finances of the University in the time-frame covered by this Report. However, unrestricted donations and endowments to support existing posts impact directly on University finances. Benefactions of this type are unusual but are expected to contribute £1m - £2m to the operating budget by the end of the decade.
54. The position for 2009-10 and beyond requires continuing action. On the basis that work is under way to address the longer term issues described in this Report, the Council is content to recommend allocations for 2008-09.
RECOMMENDATIONS
55. THE COUNCIL RECOMMENDS:
I. That the revised allocations for 2007-08 referred to in this Report be approved.
II. That allocations from the Chest for the year 2008-09 be as follows:
| (a) | to the Council for all purposes other than the University Education Fund: £148.6m. |
| (b) | to the General Board for the University Education Fund: £178.5m. |
III. That any supplementary HEFCE grants which may be received for special purposes during 2008-09 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.
| 19 May 2008 | ALISON RICHARD, Vice-Chancellor | M. CLARK | DAVID SIMON |
| TONY BADGER | S. J. COWLEY | VERONICA SUTHERLAND | |
| NICK BAMPOS | S. ENSOR-ROSE | LIBA TAUB | |
| W. BORTRICK | M. FLETCHER | JOAN M. WHITEHEAD | |
| NIGEL BROWN | D. W. B. MACDONALD | RICHARD WILSON | |
| WILLIAM BROWN | G. A. REID | S. J. YOUNG |
Note of dissent: We are concerned that the University's budgetary process is insufficiently robust and makes incorrect allocation decisions at the margin. A particularly serious problem is that we oversubsidize inessential central services while starving academic departments and student support of funds.
ROSS ANDERSON |
R. J. DOWLING |
The appendices and tables for this Report are available as a PDF file:
1 http://www.admin.cam.ac.uk/reporter/2007-08/weekly/6094/1.html - at para. 5.
2 Graced 14 November 2001 (http://www.admin.cam.ac.uk/reporter/2001-02/weekly/5866/32.html).
3 Because the changed basis invalidates comparison with the data published in previous Allocations Reports.
4 There are 70 outgoing Erasmus students in 2007-08.
5 Adjusted to exclude CARET (Centre for Applied Research in Educational Technologies) and include cost of Unified Administrative Service staff assigned to Schools.
6 Includes: academic services, staff and student services, central administrative departments, premises costs, and payments to Colleges.
7 Data from Section B of Financial Management Information (e.g. http://www.admin.cam.ac.uk/reporter/current/special/07/) excluding Associated Trusts, Cambridge Assessment, and Cambridge University Press.
8 http://www.hefce.ac.uk/pubs/hefce/2008/08_13/
9 Strategic provisions includes two elements: the Strategic Planning Reserve Fund, which provides a source of funds for initiatives, and an element for capital expenditure. There are other regular elements of capital expenditure within 'other administered funds'.