Cash crisis in universities

February 11, 2000

Latest projections show the higher education sector on the brink of deficit, prompting universities to turn to the financial markets for cash.

Revised forecasts from the Higher Education Funding Council for England show that the sector's operating surplus next year will be just 0.6 per cent of its total income. HEFCE's target operating surplus is 3 per cent. It means that while some institutions will have a healthy surplus, others will have operating deficits.

The forecasts, sent to institutions at the end of last year, show an operating surplus of 1.5 per cent of total sectoral income in 1998-99, 0.9 per cent this year, 0.6 per cent for 2000-01, rising to 0.8 per cent for 2001-02 and the year after. The sector's actual surplus was 2.8 per cent in 1997-98, Labour's first year of power.

Surpluses are forecast to fall despite an injection of cash through student contributions to fees. State funding under Labour has kept the cuts to 1 per cent up to 2001-02. The extra money has meant a readjustment of projections. Forecasts made in 1997 had indicated that the sector would be in deficit by this year.

Vice-chancellors are calling for Pounds 5 billion extra in the next comprehensive spending review, which is due to take effect from 2001-02. They say the money is needed to fund planned student expansion and the recommendations on pay made by the Bett report.

Tony Bruce, policy director for the Committee of Vice-Chancellors and Principals, said: "If the forecasted average for the sector is 0.6 per cent, then that means there will be many institutions in deficit. This means further cutbacks in staff. There must come a point beyond which the student experience deteriorates."

Some universities have already turned to the financial markets. A growing number are seeking credit ratings that can boost their chances of raising cash.

International credit ratings agency Standard & Poor's has issued full ratings on seven universities in the past six years plus limited credit assessments on four other institutions.

Craig MacDonald, an associate director, said: "The university sector will certainly be under some financial strain in the short to medium term and there will be on-going pressure on universities to expand non publicly funded activities to help offset this."

King's College, London, Standard & Poor's first public rating of a UK public-sector institution, was awarded a AA- (very strong) financial rating although it has not used this yet to raise money. Greenwich, the first new university to be rated publicly, gained a BBB/stable rating, meaning it is judged to meet its financial commitments adequately.

Greenwich also secured an AAA rating, guaranteed by a third party, specifically to raise Pounds 30 million by issuing a bond on the market.

* HEFCE has invited institutions to collaborate with consultants who will be hired to produce a report and guidelines on good financial management and strategic development. The draft report should be available towards the end of the year.

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