The Open University will have shed 200 staff and cut its student intake by 5,000 before the end of this year, according to accounts sent to the Higher Education Funding Council for England.
In the financial year to July 1997, the OU managed to turn its 1995-96 deficit into a Pounds 300,000 surplus, according to the accounts.
The university's income rose by 0.5 per cent to Pounds 215.5 million, marginally exceeding expenditure, which remained static at Pounds 215.2 million.
"But we are still right down to the wire," said director of finance Steve Chicken. "We are well below our target surplus of about Pounds 7 million. The HEFCE grants are not keeping pace with the real costs. It is a constant battle to keep our head above water."
The OU received Pounds 122 million from funding council grants for teaching and research in 1997, almost unchanged from 1996. Research grants and contracts were static at Pounds 9 million.
In 1996 the OU embarked on a major downsizing project, after its Pounds 9.2 million surplus slumped to a deficit of Pounds 700,000. During 1997-98, 200 staff will leave under the university's early retirement and voluntary redundancy scheme, the Treasurer's report for 1997 has indicated.
Redundancy pay-offs cost the OU Pounds 6.8 million in 1997, the accounts show. Total expenditure on staff for 1997 was Pounds 121 million, compared to Pounds 109.7 million in 1996.
Student numbers have also been hit. In 1996, only Pounds 1.5 million of the OU's Pounds 115 million HEFCE and TTA grants were allocated for student growth. The OU "was reluctantly obliged to reduce the intake of new students" by 3,000 compared with 1995, according to the university's 1997 annual review.
HEFCE grants for teaching and research in 1996-97 "made no provision for growth in student numbers", the OU's 1997 review said. New student intake was consequently reduced for a second year, by 5,000 in 1997.
Mr Chicken is cautiously confident that the OU "will not be too threatened next year".
"We were worried that the new funding methodology for 1998-99 would not treat the OU even-handedly," he said. "But we are quietly confident that we should be okay when HEFCE makes its announcement on March 5."
But the OU is worried that this year's pay settlement will make it difficult for the OU to meet its staff salary demands.