Reports

Report of the Council on the financial position and budget of the University, recommending allocations from the Chest for 2010–11

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 2010–11.

2. Information on trends in staff and student numbers, research, and expenditure patterns is provided in Appendices 1–4.

Overview

3. Despite the difficult, and uncertain, economic climate, it has been possible to achieve a budget for 2010–11 which is close to balance. This was due to prudent actions initiated at the start of the year to improve income streams and curtail costs, to the cooperation of the Schools and Institutions in adhering to very tight financial constraints, and to an increased concentration of research funding (QR) from HEFCE which has offset some of the cuts in our teaching grant, including the so-called ‘efficiency gain’ imposed in 2009–10.

4. However, the Council is acutely aware that producing the budget for 2010–11 has required difficult decisions and, in some cases, expedients which are not in the University’s best interests. It is clear that Schools and Institutions have already been prevented from filling posts and implementing initiatives which they had reason to believe would be affordable within previously indicated expenditure forecasts. The withdrawal by HEFCE of the Historic Buildings Targeted Allowance, amounting to £4.3m, has further widened the gap between the cost of undergraduate education and the funding the University receives. None of this is satisfactory or sustainable, and, together with the bleak outlook for government funding, points to the need for more radical action in the coming year in preparation for 2011–12.

5. It would have been possible to propose a much deeper retrenchment in activity supported by the Chest for 2010–11. However, it would have been difficult to get the scale right, and given the uncertainty, there would be a significant risk of inflicting unnecessary harm to the core operations and reputation of the University. This uncertainty also risks planning blight, so while trying to identify significant risks and their scale, this Report tries to establish a framework within which the constituent parts of the University can move forward in a constructive way. A significant part of that is to take urgent steps to secure increased levels of income for the University.

The current year

6. The Council reported in May 2009 (Reporter, 2008–09, p. 761) that the estimated total income for the year 2009–10 would be £726.9m, of which £336.7m would be Chest income and £390.2m would be non-Chest income. The overall position on the Chest was expected to be a deficit of £7.4m which on the same basis is now forecast to be £1.3m. This improved position arises from a number of changes summarized in Table 1 (p. 866). The most significant are

•a higher than anticipated contribution from Cambridge Assessment;

•prudent prior year budgeting of endowment income and interest receivable, and increased income arising from the decision to invest part of the University’s surplus cash in the Cambridge University Endowment Fund;

•higher income from composition fees than estimated, arising from changes in the composition of the student population.

7. Of assistance in keeping expenditure within budget were lower pay increases than expected together with the introduction of the salary exchange scheme for pension contributions (referred to last year) and a strengthening of procedures to review the filling of vacancies.

8. The non-Chest component of the University (excluding Cambridge University Press, Cambridge Assessment, and the Trusts) was forecast to have a deficit of £1.4m in 2009–10. This component of the budget is difficult to predict with precision in mid-year but there is currently no reason to expect a significantly different outturn.

Planning Round

9. In the Planning Round, the various spending elements of the University are normally given a provisional budget expenditure estimate closely linked to the previous Budget Report. On this occasion it was clear that there were likely to be significant changes to the parameters affecting 2010–11 including reductions in both income, particularly HEFCE grant, and expenditure, because pay settlements were likely (and proved to be) less than had been allowed for. On that basis much tighter spending limits were prescribed, and through the Planning Round discussions, all spending sectors were able to keep within the indicated levels.

10. Bearing in mind the likelihood of continuing downward pressure on income, information was also collected from the Schools and other Institutions on how further budgetary restraint might be managed.

Estimates for the forthcoming year

11. Chest income for 2010–11 is predicted to be marginally lower than projected at this point last year, while non-Chest income is predicted to be higher, principally as a result of continued growth in research activity.

12. The HEFCE Block Grant for 2010–11, announced in March 2010, is expected to be about £2m lower than in 2009–10, some £6m less than previously projected, principally because of the withdrawal of the Historic Buildings Targeted Allocation, and the application of ‘efficiency gains’. The grant announcement is itself provisional in respect of the fourth quarter, which falls in the fiscal year 2011–12, and HEFCE has reserved the right to revise allocations correspondingly. An analysis of the Grant is provided in Appendix 5.

13. The next most significant reduction is in the Chest share of income from research grants and contracts due largely to a change in the mix of sponsors away from Research Councils towards sponsors such as charities, which do not normally contribute to indirect costs, although under current arrangements some income qualifies for supplementary ‘partnership’ QR funding through HEFCE.

14. Composition fee income is projected to be £1.9m higher than previously estimated, as a consequence of the progressive implementation of decisions to increase fee levels. Projected income from Endowment income and interest is £2.7m higher than previously estimated and the regular transfer from Cambridge Assessment is projected to be £2.7m higher than previously estimated.

15. On the Chest expenditure side, the 2009 Planning Guidance represents a potential saving relative to the 2009 Budget of £7.2m. As is normal in the planning round process, a number of variances from the guidance are recommended by the Resource Management Committee and these are summarized in the table below. The increases to the Cambridge Trusts are required to ensure our bursaries keep pace with increases in fee levels and to enable an extension of the Cambridge International Scholarships Scheme (CISS). Modest increases to some of the Schools have been made in respect of improvements in RAE performance, adjustments of financial reporting of research, and anticipated fee increases resulting from the expansion of premium M.Phil. courses. Overall, the net savings achieved relative to the 2009 Budget is £4.9m.

16. The Council continues to consider that the current level of the buildings maintenance budget, adjusted for inflation, is broadly appropriate. However, in the current financial climate a £1.3m saving will again be applied in 2010–11. This is not expected to give rise to serious difficulties, but the cumulative effect of the saving will be closely monitored. The Council notes that, despite the saving on maintenance, the state of the Estate has continued to improve.

17. The combination of predicted income and expenditure outlined above results in a projected Chest deficit for 2010–11 of approximately £1.8m (Table 2, p. 866). This relatively small deficit should be viewed in the context of a total Chest budget of £351m and about £150m in unrestricted central reserves. While recognizing that the normal planning target is to achieve a 2 to 3% surplus, the Council considers that the proposed allocations for Schools and other Institutions and for investment in Estate condition and business support systems have been scrutinized in detail and that further reductions for 2010–11 would damage the position of the University.

18. 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 2010–11 is shown in Table 4 (p. 868).

19. Capital expenditure will continue at a relatively high level in 2010–11, largely on projects already in progress and funded almost entirely from benefactions and from an earmarked HEFCE funding stream (Capital Investment Framework – CIF). The table below shows projects in progress, together with the main sources of funding. The plans for capital expenditure are mainly dependent on a HEFCE CIF award of £115m notified to the University in 2008 for expenditure in the period April 2008 to March 2011. The final tranche of these funds amounting to £35.4m is still not guaranteed, and it was recognized that there was an element of risk in proceeding with current plans. However, this risk was balanced against the risk of losing funds if projects were not initiated in time for expenditure to be incurred within the tight deadline set by HEFCE. For this reason the Council has made a provision of £7.0m for potential capital expenditure and strategic initiatives which, together with the funds previously allocated, will provide a contingency against any loss of external funds for this purpose.

	£000
Potential savings in 2009 Planning Guidance vs. 2009 Budget Report	-7,158
School of Technology (RAE related increase)	299
School of the Biological Sciences (RAE related increase)	25
School of Clinical Medicine (170k RAE related increase deferred to 11/12)	0
School of the Humanities and Social Sciences (Premium fees, reporting adjusts)	1,091
School of the Physical Sciences	0
School of Arts and Humanities	0
Non-Schools (various additional cost savings)	-505
Trusts (increased support for bursaries and scholarships)	1,069
High priority IT projects recommended by the ISSS	1,000
Savings on existing systems and projects	-269
Journals Coordination Scheme	301
Interim support for Cambridge Enterprise pending review in 10/11	491
New Teaching and Learning Innovation Fund	100
Research Policy Committee, new fund to support strategic initiatives	400
Additional costs arising from Points-Based Immigration	165
Contingency	1,000
Savings in utilities costs (primarily electricity)	-1,833
Reduction in maintenance budget	-1,362
Sundry other minor variances	286
Net savings achieved relative to 2009 Budget	-4,900

---

Projects	Approx. Cost £m	Source of Funds	Predicted Construction Dates
Sainsbury Laboratory	90	Gatsby Trust HEFCE CIF	Sep 08 – Dec 10
Dept. of Materials Science – New Building	46	HEFCE CIF Wolfson Foundation	Mar 10 – Nov 11
7 West Road	16	HEFCE CIF	Feb 10 – Jul 11
Laboratory for Molecular Biology	10	HEFCE CIF Wolfson Foundation	Jun 09 – Jun12
Behavioural Suite	3	HEFCE CIF University	Jan 10 – Dec 10
Dept. of Engineering – Development of Space for New Initiatives	2	HEFCE CIF	Jun 10 – Dec 10
Dept. of Chemistry – Refurbishment of South Basement	3	HEFCE CIF University	Mar 10 – Sep 10

---

20. These allocations are additional to the elements for minor works, maintenance, equipment, and utilities included in ‘estates related expenditure’.

Looking forward

Financial projections

21. Given current economic conditions, there is every expectation that the value of funding from HEFCE will continue to fall significantly in real terms. For the purpose of presenting the projections in this Report, it has been assumed that HEFCE funding will reduce by a further £6m in 2011–12 and then remain flat in cash terms during 2012–13 and 2013–14. Assuming 2% annual inflation, this is equivalent to a cut in real terms of approximately 9% by the end of the three-year period. This prediction is based on the assumption that cuts in T funding will follow the average cuts of around 6% a year predicted for the public sector1 whereas the R grant, given the University’s strong RAE performance and concentration of STEM subjects, will receive some degree of protection.

22. In addition to cuts in T and R grant funding, HEFCE capital funding via CIF is also likely to be reduced in future funding rounds. Our CIF allocation has been running at the equivalent of over £30m a year, and if the quality and fitness for purpose of the University’s Estate are to be maintained, a compensating increase will be needed in future allocations for capital expenditure.

23. After consistent year-on-year growth in research income during the past decade, it is prudent to assume for the purpose of this forecast that research activity (as measured by direct expenditure) will not grow significantly during the next five years. Total research income is, however, expected to show modest growth above inflation due to the continued ‘roll in’ of grants on an fEC costed basis.

24. Endowment and investment income from the Cambridge University Endowment Fund (CUEF) has been projected by applying the formula set out in the regulations for the distributions from the Amalgamated Fund (Statutes and Ordinances, p. 988) with the assumption of a continuing modest recovery of the investment markets over the planning period. The formula balances the competing objectives of a stable flow of income to support operations while protecting the value of the endowment in real terms over time. This ‘smoothing’ approach allows consistency for planning and expenditure whilst adjusting gradually to changes in market values. The Finance Committee, with the advice of the Investment Board, will continue to keep the distribution policy under review.

25. Tuition fee income beyond 2010–11 is predicted to show an increase above previous forecasts, based on expected changes to the composition of the student population, especially taught Master’s Degrees, and the increased fee structures.

26. Cambridge Assessment has a robust business plan covering the next five years and the business is expected to be relatively unaffected by the global economic conditions. The contributions to the Chest shown in Table 3 (p. 867) are derived from the formula agreed with Cambridge Assessment for transfers to the University and applied to the operating surpluses shown by its business plan. Cambridge University Press currently makes a small contribution to University activities which is expected to increase in future years (see paragraph 41).

27. Projections of expenditure beyond 2010–11 have been built up from the detailed plans at School and Institution level submitted in December 2009, but, as noted earlier, it will be necessary to continue to discuss with Heads of Schools and Institutions how to match expenditure with income, as information on the latter becomes clearer.

28. The Council is clear that the University must find ways of adjusting to the new financial climate and it is grateful for the cooperative response so far. In view of the exceptional circumstances, it has agreed that projecting a deficit budget for the period up to 2014 is justified, if deemed necessary to protect the excellence of our core mission and to allow continued investment in essential capital and new initiatives. However, there must be a clear plan to return to a healthy surplus and the Council through its Financial Strategy Steering Committee is addressing this issue.

29. The current arrangement for the transfer of funds to the Colleges in respect of Home/EU undergraduates sees the transfer continue to rise to £42.0m in 2010–11, and thereafter is due to increase on an index-linked basis while the University’s income in respect of those students has already suffered from the withdrawal of the Historic Buildings allocation and is likely to fall further. A review of the agreement will be undertaken not later than 2013–14.

30. Continuing growth in post-experience education is predicted and, subject to adequate arrangements for costing and pricing, should provide useful net revenue to the Chest as well as to the Departments and Institutions concerned.

The capital programme

31. During the past decade the condition of the Estate has been improved by a programme of large-scale refurbishments and through construction of new buildings on the West Cambridge, Sidgwick Avenue, Addenbrooke’s, and Tennis Court Road sites. These capital projects have been funded almost entirely from external earmarked funds (from HEFCE and benefactors) sometimes supplemented by University and departmental funds. In order to minimize risk to central funds, the University has normally been asked to authorize capital projects only when funds to cover the full costs are identified and secure.2 As a result individual buildings have been constructed only when appropriate funds have become available. As described last year (Reporter, 2008–09, p. 763), it is now necessary to develop a more integrated approach, and work is continuing on the development of a long-term plan for capital expenditure.

32. A major factor in the upgrading of the Estate is the adoption of the latest standards for reducing the University’s carbon emissions. It must not be forgotten, however, that the activities that are facilitated by the Estate have in themselves a considerable carbon footprint. With the help of the Environment Strategy Committee, the Council is developing effective strategies to enable the University to manage and contain its carbon footprint.

33. Work continues to develop long-term proposals for the University’s land at North West Cambridge3 to provide housing for staff and students together with provision for future academic and research accommodation. Following the principles set out in the Fourth Report on the development of the University’s land in North West Cambridge (Reporter, 2007–08, p. 613), the intention is that any investment required by the University would be ring-fenced and would be recouped on financial conditions agreed for the scheme as a whole.

Uncertainties

34. The exceptional economic circumstances will necessitate tight control of public spending with a view to making a significant reduction in the public borrowing requirement. Although the extent of this reduction and its impact on the University’s income streams will not be known until late in 2010, some provisional assessment has been made (see paragraph 21).

35. In these circumstances, it is likely that the projections presented in this Report will prove to be inaccurate with the greatest risk being on the down-side. For example, if the full force of the cuts predicted by the Institute of Fiscal Studies were applied, the HEFCE income projected for 2013–14 in Table 3 would be worse by some £20m.

36. Funding cuts to HEFCE are likely to be matched by similar cuts to the Research Councils affecting a significant proportion of the University’s activity. Industry and charities have also been affected by the recession. A significant reduction in research funding would result in a decrease in activity (principally through a reduction in the almost 3,000 or so staff supported from research grants and contracts) and further reduce the contributions to indirect costs (approximately £50m a year) included in the current projections.

37. Last year the Council drew attention to the risks of increases in pension contributions, and that threat has not receded. The current Report assumes a further increase in the employer’s contribution to the Cambridge University Assistants’ Contributory Pension Scheme (CPS) from 2011–12; and there remains a risk of the need for further such increases in respect of USS. (A 1% increase in employer’s contribution would cost the Chest around £2m a year).

38. It is clear that the current income streams associated with UK/EU undergraduate students are not adequate to meet the cost of the quality of teaching provision which Cambridge provides. The extent to which the outcome of the Browne Review (Reporter, 2009–10, p. 498) will mitigate this situation and on what timescale is unknown. Hence no assumptions have been made about any additional income which may arise, for example, from raising the cap on home undergraduate fees. In the meantime, it is imperative that the University and Colleges work together in developing a sustainable model for the funding of Cambridge’s undergraduate education.

39. The UK government is committed to challenging reductions in carbon emissions, to which the University will be legally required to make its contribution. While some reductions in carbon emission will be achieved through minor changes to our existing practices, the scale of reductions required over the next decade may require significant expenditure.

Conclusions

40. Bearing in mind the current uncertainty in the economic outlook the Council proposes a budget based on zero cash increases to Schools and Institutions. It accepts the need to run a modest deficit over the next few years provided that it is contained and there is a clear plan to return to year-on-year Chest surpluses.

41. To further mitigate the effects of the downturn, the Council has initiated a medium-term action plan focusing on strengthening our research grant applications, increasing fees, expanding our provision of, and return from, post-experience education, and reducing our electricity usage. Work is also in progress to reduce the risk of further pension cost increases. The business plans of both Cambridge Assessment and Cambridge University Press aim to deliver steadily increasing income streams to assist the University in its wider purpose.

42. Given the uncertainty, the income position may prove to be significantly worse than has been assumed. The situation will be closely monitored and contingency plans are being developed, in particular through further meetings with Schools and Institutions to review expenditure against up-to-date forecasts of income.

43. Finally it should be remarked that the current fragility of government income streams highlights more than ever the long-term value of a healthy endowment and diversification of income source. Considerable progress has been made by the University and Colleges over the last few years in developing fund-raising capability. This must be sustained and enhanced further with the long-term goal of achieving endowment levels similar to the international peers with which we must compete.

Recommendations

44. 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 2010–11.

45. The Council recommends:

I. That allocations from the Chest for the year 2010–11 be as follows:

(a)to the Council for all purposes other than the University Education Fund: £164.9m.

(b)to the General Board for the University Education Fund:4 £188.4m.

II. That any supplementary HEFCE grants which may be received for special purposes during 2010–11 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 I above be adjusted accordingly.

17 May 2010	Alison Richard, Vice-Chancellor	M. R. Clark	F. P. Kelly
	David Abulafia	S. J. Cowley	Vanessa Lawrence
	N. Bampos	M. J. Daunton	Debbie Lowther
	R. J. Barnes	A. M. Donald	Rachael Padman
	Nigel Brown	R. J. Dowling	David Simon
	William Brown	David Good	Joan M. Whitehead
	T. Chigbo	Christopher Hum

• Tables and Appendices