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DfE committed to £200m of contracts for loan sale that’s not proceeding

Page 221 of the Department for Education’s 2019/20 financial statement contains the note reproduced above.

The sale programme for “pre-2012” student loans was cancelled in March. But DfE looks like it will be paying out over £30million per year for the next few years to financiers anyway. Total liabilities are booked above at over £220million.

£11 billion of “Supplements” used for loans

Given the relative absence of higher education from yesterday’s Autumn Statement, I turned my attention to the Department for Education’s 2019/20 annual accounts, which were published earlier this month.

Regarding student loans, we have been in something of a hiatus since 2018, when Theresa May announced an review of post-18 funding and commissioned the Augar panel, which reported last summer. Although there were suggestions that we might get a long overdue response to the latter yesterday, we will probably have to wait now until the Budget next March, when the government will hope to have a better sense of its spending commitments.

That leaves student loan finance in limbo with the small, nominal budget allocation for loan write-offs shored up by large “Supplementary Estimates” provided by parliament each February.

This is in spite of an apparent “target RAB” of 36% and a budgeting process hanging over from 2014, when the old department for Business, Innovation and Skills (BIS) had responsibility for loans and was being “incentivised” to reduce the cost of the loan scheme. You can see both of these features still stipulated in the latest Consolidated Budgeting Guidance, but they represent zombie policy with little to no bearing on events.

Why so? Well, DfE was given an extra £12billion plus back in February to supplement 2019/20’s budget for “non-cash RDEL” (mostly student loan “impairments”) of £4.7billion per year. (Student loans are “impaired” because the loans are worth less in estimated repayments than the cash advanced.) The supplement produces a total that is more than triple the original allocation.

And… DfE managed to spend nearly £16billion of that last year. The accounts report an “underspend” of £1.1bn against that total.

As can be seen from the table below, “Fair Value movement” for student loans amounted to a non-cash cost of over £14billion.

£17.6billion of new loans were issued, a net increase of £15billion once repayments of over £2billion are considered, but the new impairments on post-2012 loans increased by £12.3billion; for “pre-2012” loans the stock remaining at year-end lost nearly £1.7bn when revalued.

Although the nominal value (“face value”) of outstanding post-2012 loan balances is nearly £105billion, those loans are thought to be worth less than £50bn.

Read more…

End of student loan sale programme

There was a lot going on in mid-March and I somehow forgot to add a post when the government announced that it was ending its student loan sale programme.

I had predicted this in January and that post contains a full explanation as to why such a decision was likely.

In short, it’s because there was no longer a presentational advantage from the sale and the accounting change introduced by the ONS meant that the losses on sales (the difference between cash raised and book value) now hit the headline fiscal statistics.

New Governance Code

The Committee of University Chairs has published an updated Governance Code.

I’ve worked extensively with union branches over the last year and I think one points is worth citing from the Code, since it warns against behaviour seen at some universities.

There is only one category of governor / trustee, regardless of how they are appointed to the governing body.

§1.4 All members of the governing body (including students and staff members) share the same legal responsibilities and obligations as other members, so no one can be routinely excluded from discussions. All members have a duty to record and declare any conflicts of interest.

I would add to my emphasis above by suggesting that this also means that members who are elected by staff or nominated by trade unions should not be prevented from seeing papers that have gone to committees.

§3.2 Members of governing bodies need to act, and be perceived to act, impartially, and not be influenced by social or business relationships. Institutions must maintain, check and publish a register of the interests of members and senior executives.

A member who has a professional, pecuniary, family or other personal interest in any matter under discussion which may be seen to conflict with the best interests of the institution must also disclose the interest in advance of any discussion on the topic.

A member does not have a pecuniary interest merely because they are a member of staff or a student.

(Again my emphasis.)

Liquidity in Wales and England

After my July UCU presentation on institutional finances, I was asked what the situation in Wales was with regard to liquidity and regulation.

Office for Students currently requires institutions to alert them if liquidity falls below 30 days.* This “reportable event” is designed to give the regulator notice that intervention might be required or a “market exit” managed.

It is not to be confused with a prudent level of liquidity. Most universities would specify the equivalent of 45-60 days as required for the “working capital” needed to cover daily activities.

The HEFCW Financial Management Code  doesn’t specify a minimum level, but requires Welsh HEIs to be more liquid.

86f. The institution must ensure that it retains sufficient liquid cash or equivalents to service working capital requirements as well as a prudent level of liquid reserve to be called upon in the case of extraordinary events;

This reference to prudence indicates that Welsh regulation is still aligned with Charity Commission guidance for charities to be able to cover 90 days of expenditure. Or more pointedly, it indicates the difference between the regulation of a quasi-public service and the market competition seen in England.

Some English universities did reason that they didn’t need to have so much cash and near-cash to hand as they weren’t reliant on donations and so income was more predictable.

The last few months have undermined that argument: projected income for 2020/21 has moved dramatically. Those institutions without significant liquidity (which can incorporate overdrafts and revolving credit facilities) were moved to push the expected shock from Covid on to operating budgets and staff pay and conditions. This was clearly bad practice and has affected staff goodwill, even if budgets now look very different for this financial year.

If universities manage to avoid a financial shock from the pandemic, many need to recognise that they were not in a good position. The idea that liquid reserves hoard resources that would be better invested in buildings seems to have had widespread currency. This year should really produce a rethink about the merits of “efficient” or “lean” approaches to treasury practice.

Had the pandemic arrived with the kind of impact that many universities were modelling, then some would have been lucky or unlucky depending on where they were in their capital development cycle. If they had borrowed to invest and not yet spent the money, they would have got through. If they had spent the money …

That’s not good enough. It’s bad governance not to have contingency or “rainy days” funds.

*The “liquidity days” measure calculates the number of days of average expenditure that an institution can cover from cash and current investments (things that can be readily turned into cash like deposit accounts with notice periods) if income were to dry up. It measures the ability to deal with a short-term shock.

Calculations vary but a typical measure would see annual operating expenditure less depreciation and adverse pension movements (both non-cash expenditure items) divided by 365 to give the average daily expenditure. The amount of cash and current investments on hand can be then be used to arrive at the number of days that can be covered.

Private Eye coverage

private eye July 2020

Private Eye (3-16 July) picked up on a report I wrote for Sussex UCU back in May.
These reports are normally confidential and used to inform negotiations.
If your branch is looking for some analysis, please let me know. I might have some time in August.

 

 

Webinar recording: Understanding University & College finances

I ran a webinar for UCU on Wednesday 8 July covering some basics on university finances.

It was recorded and can be found here along with the slides I  used. We were originally planning to run training days in April and May, so this 90min presentation with questions is a little quick.

It followed on from a blog I did for UCU on the same topic.

 

Challenging the financial narrative

Here is a link to a guest post I have written for UCU’s “Fund the Future” campaign.

https://fundthefuture.org.uk/challenging-the-financial-narrative/

I will be participating in a webinar next Wednesday lunchtime for UCU branch officials on university finances.  You can get details from your Regional officers.

Information provision & the CAC

… the greatest problem of the guerrilla band is the lack of ammunition, which the opponent must provide.

UCU branches that are recognised will have an agreement with clauses pertaining to the disclosure of information for bargaining and consultation.

We are currently in a situation where it is not possible to rely on published sources of financial information. Universities publish accounts once per year. The latest such accounts should have appeared in December and cover the year to 31 July 2019. That is, they are over nine months out of date and were in any case retrospective. Moreover, they are “pre-covid”.

As universities consider the potential hits to income for the next academic year and try to draw up budgets, they will have prepared financial scenarios. UCU branches should be requesting these. It’s not possible to assess any proposals put forward by management without the ability to interrogate the assumptions and models. It’s also important to check that you are seeing the same range of scenarios as governors and regulators.

Where an employer refuses to disclose essential information, the recognised trade union has the right to complain to the Central Arbitration Committee, who have the power to adjudicate and require compliance with their judgments.

I won a case at the CAC about 20 years ago. My chief memory of it was the delay in having the case heard, so it is better to get a complaint in early. But it was possible to get the employer to produce data and information , even where it wasn’t necessarily to hand (as in my case: a breakdown of starting salaries by sex and ethnicity in different departments). It was also relatively easy process and hearing for an amateur like me to navigate.

CAC’s Code of Practice on information disclosure is extremely useful and gives examples of the kind of information it considers pertinent to bargaining (section 11).

iv) Performance: productivity and efficiency data; savings from increased productivity and output, return on capital invested; sales and state of order book.
(v) Financial: cost structures; gross and net profits; sources of earnings; assets; liabilities; allocation of profits; details of government financial assistance; transfer prices; loans to parent or subsidiary companies and interest charged.

I would take “state of the order book” to be analogous to what universities are currently fretting over.

Note that the restrictions on the “general duty” to disclose (sections 13ff.)  set a much higher bar for the employer than the equivalent exemptions for Freedom of Information, which has a different emphasis on publication and public interest. The assumption would be that the information disclosed for bargaining purposes may have conditions set on how and how far it can be disseminated. I would say you should be looking to invoke these disclosure of information rights over FoI.

Given that you need to put your request for information in writing to management (and give them suitable period by which to respond), I would recommend considering the option early.

It’s very apparent across the sector that different institutions take very different approaches to the disclosure of information, but it is essential to know what recourse you might have.

If anyone has more recent experience of complaining to the CAC, please let me know, either privately or in the comments below.

And obviously there are plenty of other documents you might need sight of. A look through papers going to Board/Council and the audit, risk and finance committees will help here.

update 9 July 2020

In the section quoted above from the CAC Code of Practice, I would take “liabilities” to cover debt and debt covenants.

 

Accounting for activists

I was hoping to have been able to announce a couple of new initiatives, but world events have postponed them.

I can write about one of them. I had agreed to deliver some training events for UCU, designed to explain accounting to officers and branch activists and explain methods of getting information out of university management. The first three events should have started this month.

If you have general questions about university accounts and financial information, then you can post them here or email me and I will try to answer some questions through the blog. If I have time, I will try to make some of my training materials available on this site.

I am still taking commissions for in-depth and “scoping” reports on individual universities. If you think you might want some help working out how coronavirus is going to affect your institutional finances, do drop me a line. In general, I think the sector has been far too casual about the vulnerabilities in the standard business model and many universities were already struggling before the virus arrived. I was already expecting our first “market failures” / interventions of the new funding regime this calendar year.