No 6308
Wednesday 22 May 2013
Vol cxliii No 31
pp. 544–578
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 2013–14.
2. Information on trends in staff and student numbers, research, and expenditure patterns is provided in the usual way in Appendices 1–4 (pp. 563-575 ).
3. In the 2012 Budget Report the Council continued, as in 2011, to emphasize the need for tight budgetary constraint, but noted that overall prospects seemed to be improving. Although allocations were not reduced in cash terms, Schools and institutions were asked to plan on an increase of only 1% in allocation in 2012–13 and thereafter.
4. The key message of this Budget Report is that, whilst the hoped-for improvement is materializing, and the projected financial position of the University continues to improve steadily towards modest surpluses, there remain significant uncertainties in the external environment, and it remains as important as ever that the University practises financial restraint and seeks to secure value for money in all its activities and continues to diversify income streams. In particular, the Council remains concerned that the University should manage its resources in such a way as to enable continued capital investment at a level consistent with global competitiveness.
5. 2012 saw the first intake of students under the new funding regime. It remains too early to assess the precise impact of the new regime on the University’s finances. Early estimates, however, confirm the prediction that, for Cambridge, the new regime will deliver a small increase in the resources available for teaching. The analysis of the cost of providing an undergraduate education in the collegiate University has been refined over the course of the year. Whilst the Council now believe that the original method of analysis overstated the cost, the revised method nevertheless shows that costs exceed the funding received by an estimated average of £5.5k per student per year. The Planning and Resources Committee (PRC) have established a working group, which includes representation from CUSU, to continue to review and refine the method and to improve the understanding of the costs of undergraduate education. The extent of the funding gap, and its relation to the distinctive nature of educational provision in the collegiate University, has been recognized by the award by HEFCE of £2.7m additional funding per annum for three years under their scheme of Institution-Specific Funding.
6. Research funding remains highly competitive, despite the relative protection afforded to the science budget by government. Investment in the Research Strategy Office has improved our ability to respond to large, collaborative, strategic bids, although this continues to represent a challenge in an institution with a strong tradition of single-investigator-led grants. Under current government economic policy, there is a strong presumption that public funds should be used to leverage private sector funds. This has extended to the science budget in both graduate education, where Centres for Doctoral Training (CDTs) have been launched funded by the University and the Research Councils, and in funding for research capital under the UK Research Partnership Investment Fund which requires a contribution from private sources to match the public funding in the ratio 2:1. The Council considers that continuing to grow our capability to respond to major competitions such as these remains a priority for the University.
7. In October 2012, the University issued £350 million of bonds at a coupon of 3.75%. The proceeds of the bonds have been invested following conservative investment practices until applied for the North West Cambridge development and other capital investments. The investment gains are expected to cover the interest cost of the bonds over the plan period and therefore will not be a draw on the Chest.
8. Taking into account the above internal and external factors, this Budget Report recommends allocations from the Chest for 2013–14 which result in a Chest Budget which is broadly in balance. This represents a significant improvement over the forecast deficit of £8.4m in the previous Budget Report. On current projections, the forecast out-turn for the remainder of the planning period is broadly balanced, with revised projections for overhead income, changes to state pensions and future maintenance costs eroding the previously projected surpluses.
9. HEFCE funding for teaching has decreased by £10m compared to 2012–13. This is the effect of the introduction of the new student funding regime for entrants from October 2012 and is offset by additional fee income. The reduction is less severe than forecast in the last Budget Report, due in part to the award of HEFCE Institution-Specific Funding.
10. HEFCE funding for research has increased slightly. Mainstream QR is awarded at the same level as previously. Increases are attributed to volume-driven growth, mainly in Charity Support funding.
11. In 2011–12, the Chest out-turn was a deficit of £0.4m, as compared to the original (in the 2011 Budget Report) forecast deficit of £9.2m. The most significant element of this favourable variance was the strong performance of Cambridge Assessment, which transferred to the University £8m more than forecast. The Chest out-turn for 2011–12 is detailed in Table 1 of this Report.
12. The Council reported in the 2012 Budget Report that the estimated total income for the year 2012–13 would be £810.6m, being £364.8m Chest income and £445.8m non-Chest income. The overall position on the Chest was expected to be a deficit of £6.8m, which is now forecast to be a deficit of £7.3m. The latest forecast for the Chest in 2012–13 is detailed in Table 2 of this Report.
13. For the purposes of this Report, allocations to Schools and institutions are assumed to be fully spent even if a balance is carried forward to the next year. There is evidence that funds are being managed carefully with actual expenditure from allocations slightly below budget. The underspends will assist Schools and institutions in meeting future budgetary constraints.
14. Externally funded income-generating activity (not including Cambridge University Press, Cambridge Assessment, and the Cambridge Trusts) was forecast to generate a small surplus of £0.5m in 2012–13 after making a contribution to the Chest for the central costs which support the activity. This component of the budget is difficult to predict with precision mid-year, but there is currently no reason to expect a significantly different out-turn by the end of the year.
15. In July 2012, the PRC again re-confirmed the Planning Guidance issued in previous years. Accordingly, Schools and other institutions have prepared forecasts of income and expenditure on the assumption that their allocation from the Chest will be increased by 1% in 2013–14 over 2012–13, and for each year thereafter.
16. Allocations to Schools and institutions include an allowance for the annual pay award. Allocations have in the past been adjusted to reflect the actual pay award, and this has in recent years resulted in a saving to the Chest as compared to the Budget Report. The cost of incremental progression, promotions, etc. is met from within the allocations made to Schools and other institutions: no separate recurrent provision is made.
17. Non-pay inflation within Schools and institutions has generally been assumed to be at 2%. Non-pay allocations within Schools and institutions meet largely general office and laboratory operating expenditure, and the Council consider that 2% is an appropriate rate of inflation for these items, especially in view of the need to continue to pursue value for money. Where Schools or institutions are aware of items which are subject to different rates of inflation, those rates have been used. Similarly, large items of university-wide expenditure such as utilities, insurance, etc., which are funded via administered funds, are estimated using an appropriate item-specific inflation factor.
18. The Resource Management Committee (RMC) continue to operate a Resource Allocation Model (RAM) and a RAM Distribution Model (RDM) in order to ensure that Schools are provided with incentives to maximize Chest income and minimize Chest costs. Under the RDM, a School which has a surplus greater than 5% of its out-turn in the year-end RAM, receives an addition to its baseline in the next planning round equivalent to 10% of the excess surplus. Similarly, a School which is in deficit by more than 5% receives a reduction in baseline of 10% of the excess deficit. The operation of the RDM based on the 2011–12 out-turn has resulted in an addition to 2013–14 baselines for two Schools and a small decrease for one. The total additional cost to the Chest in 2013–14 as a consequence of the RDM is £349k.
19. In addition to the general uplift in allocations and the RDM, the RMC has continued to receive bids from Schools and other institutions for additional increases in baseline allocations. In particular, the RMC have wished to preserve a mechanism which allows them to make investments in new activities, particularly where these will deliver a positive return to the Chest over the planning period. The total cost of these additions in 2013–14 is £1.75m, supported by projected income of £2.6m.
20. Non-School institutions are also able to bid for additional resources over and above the planning envelope during the planning round. Such requests are considered initially at the scrutiny meeting for the institution, and then again by the RMC alongside other bids for resources. In the current round, the RMC has agreed to recommend increases in allocations totalling £323k.
21. Over and above these additional allocations to Non-School institutions, the Council have previously agreed that the allocation to CUDO should be increased by £3.1m, in order to support a significant increase in development activity, and to provide better co-ordination across Schools, Faculties, Departments, and Colleges. Whilst this level of investment is significant, it is anticipated that it will result in substantially increased returns for the University as a whole. Without this investment, it is likely that the Council would have to recommend substantially higher allocations to the Capital Fund and to Schools and Non-School institutions to support new activity. A relatively modest assumption, included in the figures in this Report, is that this investment will deliver £1m of recurrent savings to the Chest as compared to the current baseline, in addition to funds for new capital and recurrent activities.
22. The third element of the planning round is the Administered Funds. These are funds which are administered centrally to meet University-wide costs or, in some cases, against which Schools and Non-School institutions may make bids. The Resource Management Committee has considered recommendations from the Administered Funds Scrutiny Group, and is recommending that, in aggregate, the allocation to Administered Funds be increased by £3.45m compared to 2012–13 (an increase of £0.8m over the previous forecast for 2013–14).
23. Chest income for 2013–14 is forecast to be £383.4m. Chest expenditure for the same period is forecast to be £383.7m. Forecasts of Chest and Non-Chest income and expenditure for 2013–14 are detailed in Table 3 of this Report. Forecasts for the remainder of the planning period are given in Table 4.
24. The following table shows additions to the allocations to Schools and other institutions, made via the mechanisms described in paragraphs 11 to 14 of this Report.
|
School or Institution |
£k |
|
|
School of Arts and Humanities |
285 |
|
|
School of the Humanities and Social Sciences |
242 |
|
|
School of the Physical Sciences |
130 |
|
|
School of Technology |
507 |
|
|
School of the Biological Sciences |
271 |
|
|
School of Clinical Medicine |
666 |
|
|
CUDO |
3,114 |
|
|
University Library |
102 |
|
|
Kettle’s Yard |
79 |
|
|
University Counselling Service |
20 |
|
|
UAS |
57 |
|
|
Institute of Continuing Education |
65 |
|
|
Total |
5,538 |
25. In accordance with the outcome of the procedure described in paragraph 15 of this Report, the Council is recommending that the allocation to the Buildings Maintenance Fund be maintained at approximately the current level of £16m until 2015–16. An accumulated balance within the fund will be spent down over that period, following which a significant increase in the allocation is anticipated.
26. The Operating Budget described in this Report is developed and managed on a fund accounting basis. The University’s annual 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 to a format comparable to the Income and Expenditure account 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. To aid comparison with the Financial Statements, such a conversion of the Operating Budget for 2013–14 is shown in Table 5. The Council considers, however, that the format used in Table 3 is the appropriate one for planning.
27. The Chest is projected to return to a small surplus in 2014–15, with further modest improvements in 2015–16 and 2016–17.
28. The forward forecasts are prepared on the assumption that the Home and EU undergraduate fee will be held at £9,000 for the remainder of the planning period.
29. Projections of expenditure have been built up from detailed submissions made by Schools and other institutions in December 2012.
30. Pay awards have been assumed at a level of 1% per annum.
31. Transfers to Colleges for the College Fee for Home and EU undergraduates will be made on the same basis as last year.
32. 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. 1034) 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.
33. The Planning and Resources Committee continue to develop the Capital Planning Framework. It has become apparent to the Committee that the demand for major capital projects remains very strong, with significant developments planned at two ‘greenfield’ sites (West Cambridge and the Cambridge Biomedical Campus) as well as the redevelopment of the central sites including the New Museums site and the Old Press site. The Capital Fund is not able, at its current level, to support all of the major planned developments. Moreover, the Planning and Resources Committee consider that it is important to maintain a level of flexibility within the fund, to allow the University to contribute to medium-size projects as opportunities arise. Accordingly, provision is included in the forecasts for an increase of £50m in the Capital Fund spending limit over the planning period.
34. The Capital Planning Framework includes a Green Zone, representing not only projects to which there is a formal level of commitment (i.e. Regent House approval), but also projects for which the PRC have given approval for development to the point where a Report can be published. Projects currently in this Green Zone include the re-location of Geography and Land Economy to the New Museums site, the relocation of Chemical Engineering and Biotechnology to West Cambridge, the refurbishment of the Arup Building, a new Heart and Lung Institute on the Cambridge Biomedical Campus, the University Data Centre at West Cambridge, and the University Sports Centre.
35. As in previous years, assumptions made about pay awards are a key area of sensitivity. Chest-funded pay costs are in excess of £200m, and so a small increase in pay in percentage terms represents a significant additional cost to the Chest. The Council has noted that there continues to be a significant emphasis within Government on public sector pay restraint, and expects pay within the Higher Education sector to reflect this. Revised arrangements for the State Pension, which have been brought forward to 2016–17, will have an impact on the Chest pay bill.
36. Despite the challenging economic environment, research income has held up well. Direct income rose by 5% in 2011–12 and is ahead of target in the current year. The Council believes that the introduction of Strategic Networks and Strategic Initiatives has made a significant contribution to this resilience; in particular, they have improved the University’s competitiveness in gaining funding for large research programmes. Research grants linked to Initiatives and Networks now make up well in excess of a third of the University’s research portfolio. For example, 271 awards with a combined value of £120m are linked to the Energy Initiative; and 321 awards with a combined value of £227m are linked to the Cancer Initiative.
37. In contrast, despite the above noted 5% increase in volume, indirect research grant recovery has decreased from £46.7m in 2010–11 to £44.1m in 2011–12. This is due to a combination of factors, including a shift in the grant portfolio towards sources such as the EU which pay lower rates of indirect costs; and efficiency savings which have been imposed on Research Council indirect cost recovery.
38. Shortly following the publication of this Report, the Chancellor of the Exchequer is expected to publish his Spending Review. Early indications are that, whereas in previous rounds of cuts the Higher Education and Science budgets have enjoyed a level of protection, the forthcoming spending period could be very challenging indeed for the sector.
39. The review of IT, referred to in the last Budget Report, has recommended the merger of the UCS and MISD. Notwithstanding the final decision on this recommendation, the PRC have approved the co-location of the UCS and MISD in the Roger Needham Building following its vacation by Microsoft Research. This will require a transfer of the building into the operational estate, at a cost to the Chest of £1.5m per annum due to lost rental income.
40. Following a review of CUDO and Cambridge in America, the Council has agreed to recommend a significant increase in the allocation from the Chest to support increased development activity. As described in paragraph 14 of this Report, the financial projections underlying this Report include the full costs of this additional allocation, less an assumed cash benefit to the Chest (as compared to baseline) of £1m.
41. In five out of six Schools, Chest-derived reserves continued to grow in 2011–12 and in the first two quarters of 2012–13. However, projections across the planning period are for a reduction from the current level of £44m to £24m. The Council consider that, with the current economic outlook, it is necessary that Schools continue to be willing to spend down their reserves in order to support a balanced budget.
42. Preparations are underway for the Research Excellence Framework (REF). The outcome of REF submissions will be known at the end of 2014, and will determine HEFCE quality-related research funding from 2015–16.
43. The recommendations in this budget are consistent with the strategy that has been followed since 2009. The baseline allocations to Schools and institutions continue to be set below inflation, but with mitigation to allow investment in new initiatives. The financial prudence exercised over the last four years has resulted in a return to a balanced budget ahead of schedule. Furthermore this has been achieved whilst continuing to invest in important initiatives including support for the REF, the next fund-raising Campaign, and critical infrastructure projects.
44. Set against this improving financial performance, the general economic outlook remains uncertain. The outcome of the next Spending Review is expected to put further pressure on the Higher Education sector. Pension deficits and changes to state pension contributions will continue to challenge, and sterling depreciation and inflation generally will make it hard to contain our costs. Against this background, Council believes that the current fiscal discipline of a 1% annual increase in baseline allocations should continue until the general outlook does improve.
45. The Council recommends:
I. That allocations from the Chest for the year 2013–14 be as follows:
(a)to the Council for all purposes other than the University Education Fund: £175.7m;
(b)to the General Board for the University Education Fund: £208m.
II. That any supplementary HEFCE grants which may be received for special purposes during 2013–14 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.
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20 May 2013 |
L. K. Borysiewicz, Vice-Chancellor |
Nicholas Gay |
Rosalyn Old |
|
N. Bampos |
Andy Hopper |
Rachael Padman |
|
|
Charles Bell |
Fiona Karet |
Shirley Pearce |
|
|
Jeremy Caddick |
Robert Lethbridge |
John Shakeshaft |
|
|
Stephen J. Cowley |
Mark Lewisohn |
Sam Wakeford |
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|
Athene Donald |
Rebecca Lingwood |
I. H. White |
|
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I. M. Le M. Du Quesnay |
Mavis McDonald |
A. D. Yates |