Policy Exchange’s accounting errors
Wonkhe has corrected a comment piece that appeared earlier today on its site that originally confused surpluses and reserves.
The comment piece was there to promote a new report from Policy Exchange calling for resources to be diverted from English HE to FE. Their case hinges on the level of reserves seen on average across the university sector.
Unfortunately Policy Exchange are just fundamentally confused about accounting.
The question to ask, therefore, is not “would cuts be harmful”, but “where would cuts be least harmful in the context in which we find ourselves”. The answer is that when looking at the post 19 education and training system as a coherent whole, the HE element is significantly better funded than its FE counterpart, has substantial cash reserves which could be better utilised than sitting in banks, and has made insufficient progress on efficiency savings to date when set against either FE or any other public service. This then is the case for a reallocation of resources away from HE to protect FE.
Higher, Further, Faster, More p.11
The evidence used to back this claim comes from Hefce’s most recent annual report on the Financial Health of the sector. Policy Exchange cite a figure of 48% for reserves.
55. Discretionary reserves at the end of 2013-14 totalled £12,292 million, after taking into account the impact of the financial reporting standard on retirement benefits (FRS17). This reporting standard, which requires pension scheme surpluses or deficits to be included in the balance sheet (but not yet those of multi-employer schemes such as the Universities Superannuation Scheme (USS)), makes comparisons with previous years more difficult. Without FRS17, reserves totalled £16,472 million, equivalent to 64.4 per cent of total income.
56. Total reported pension scheme deficits (excluding those relating to multi-employer schemes) increased by £678 million to £4,180 million in 2013-14, reducing reserves to 48.0 per cent of income.
The full Policy Exchange report includes this Figure from Hefce’s report.
click to enlarge
Unfortunately, as a Hefce footnote makes clear: ‘discretionary reserves’ are not ‘cash reserves’.
Discretionary reserves are equal to expendable endowments plus general reserves from the balance sheet.
And general reserves is a measure achieved by comparing all assets – not just cash, but also properties for example – to all liabilities. It isn’t cash reserves either (cash would normally be classed under ‘current assets’)!
JNCHES’s guide to university financial reports (a recommended read!) puts it this way:
[Look at] your assets and liabilities at the end of the financial year – the difference is called your ‘equity’ and will be referred to in accounts as your Reserves.
Think of it like a private house. Usually, the outstanding mortgage will be less than the value of the house, so you’ll have a positive equity. It can be the other way round and that can be a serious problem for an individual or an institution. For substantial organisations like HEIs, balance sheets need to accommodate a variety of transactions with rather technical labels, but the essence of the statement remains – assets less liabilities equals reserves. …
However big your reserves are, they’re not the same as cash. To convert reserves into cash, you’ll have to sell assets. Don’t assume those assets will sell for the amount showing on the balance sheet.
But they’ve missed the fundamental error made by Policy Exchange – they mistook reserves for cash!
And in doing so, peddled some dangerous nonsense.