"The Governor View" - University finances and financial sustainability

According to the Office for Students (OfS), universities have managed their money well during the pandemic. Its recent report on the financial sustainability of higher education in England found that the short-term viability of most providers looks sound, with the majority performing better over the last year than anticipated.

However, beneath the sector-level picture there continues to be significant variation in financial performance, with 21 universities - just over 8 per cent of the total - predicting a downturn in student numbers to 2025-26.

Three areas of risk identified by the OfS present ongoing challenges to just about all institutions: the impact of inflation on costs, and the problem of growing income to meet rising costs; increasing reliance on fees from overseas students in some business plans; and meeting investment needs for facilities and environmental policies. 

Governors who spoke to Advance HE highlighted all these challenges and argued that in general, the landscape that universities are operating in provides few opportunities to address them or pursue other courses of action.

Reliance on international student income is inevitable at a time when home fee income is falling in real terms because of rising inflation, according to the governor of a specialist institution in the South East of England.

“The significance of international students for some institutions is the difference between going bankrupt or not,” she said. “The international student market is growing because institutions have no other option; the UK undergraduate market doesn’t cover the costs in many subjects.”

Having contingencies in place is vital, particularly given geopolitical instability and the lesson learnt from the pandemic that “the unthinkable” can happen.

“From a governor’s perspective, there is a focus on trying to ensure diversification and that there is a mitigation strategy,” she said. “We are looking at risk registers and asking ‘what is the next thing that can knock us like Covid did?’”

Income from overseas students is essential to fund core university activities, and it is not clear to governors where significant alternative funding would come from. What governors are not expecting is that more funding will be forthcoming from the public purse.

“Unfortunately given all the other challenges facing the economy, health in particular, higher education is not seen as a vote winner and is not considered as a priority that needs to be addressed in the run up to a General Election,” says the chair of governors at a university in Wales. “That makes it doubly difficult for the sector - it is a real challenge for us to get our message across so that ministers properly understand the scale of the challenge that is facing us.

“You might look at overall balance sheets and reserves, but in many cases these reserves are buildings which are part of the campus and you can’t dispose of them as you need them. Some universities have very healthy balance sheets and significant endowment funds but in other areas, it is a very different and difficult picture.”

In Wales, funding cuts of £5 million and a cap on tuition fees at £9,000 a year is further stretching finances.

Similarly north of the border,  £46 million due to be spent on the Scottish college and university sector has now been identified as an "essential saving". The Scottish Funding Council says that the sector faces a "challenging" financial environment in the wake of its own financial sustainability report.

Nor are governors expecting a rise in tuition fees any time soon. “The raising of fees is potentially a vote loser,” said one governor.

According to a governor in Wales, many institutions are moving towards a “tipping point” where higher staff wages/pension contributions are “simply unaffordable”.

“It might not be this year - as there are some mitigations you can put in place - but if we don’t manage to boost income significantly, governors across the country are seriously looking at this challenge of long term sustainability,” she says.

The consensus is that there will be “very difficult choices in the next couple of years”. Some institutions are already looking at “portfolio management” - reducing modules, courses, programmes or even subject areas. In its financial sustainability report, the OfS referred to this measure as “rationalising the teaching portfolio” and said some providers had “successfully restored their financial position” by using it.

But it comes at a cost, illustrated vividly by one governor at a new university who said one of the most difficult things he has had to do in the role is sit on a redundancy appeal panel.

“One thing that we are doing - and I’m sure other people are doing is looking at – is rationalising courses and programmes,” he said. “It is very tough: imagine making a professor of English, at the age of 48, redundant. What are they going to do now? It is very challenging out there, particularly in the humanities.”

And while such measures may protect other programmes at the university, there is a potential cost to students too, with fewer module choices, bigger classes and a lower staff to student ratio. Other strategic decisions driven by finance concerns, such as recruitment freezes, have similar implications.

Governors warned that in times of financial pressure, “non-core” activity becomes harder to pay for. This could include “anchor institution” activity, such as partnerships with the local community. Another governor cited a potential threat to the record levels of investment in student mental health and wellbeing.

From a governing board perspective, strategic decisions have to be made in a timely fashion. As one governor puts it, “you need to have been noticing that the car is sliding down the hill before it gets to half way because once it has momentum, it is a much more difficult thing to stop or reverse”.

Another governor explained: “These are substantive considerations - have we got too many sites, we are running too many courses that are too small. Then you move into bigger strategic planning, such as getting management to review the portfolio properly so that loss making programmes are shut. When the squeeze is on, you will be looking at major costs. You might have an old site which is going to cost you £50 million in a couple of years to keep going. Can you afford that?”

The cost of borrowing can prohibit investment in the estate and potentially stall progress on environmental and energy management. The governor of a specialist institution points out that much of the government incentivisation comes in seed or matched funding or from local government, where the path to the cash is far from clear.

“Everywhere will have a slightly different dynamic that means you are always playing that opportunity cost - is it worth sending Fred somewhere or getting him to write a bid for so and so?” she says. “The journey to net zero can be costly, particularly if you haven’t already got things in place.”

There is also a tension between how much is spent on research and on teaching. A governor in Wales points out that research funding only covers about two thirds of the cost of producing it and that Wales receives comparatively less research investment than in other parts of the UK.

A governor at a new university in England points to a drive at his institution to increase research, which has brought in more funding, but questions whether the investment is justified by the returns.

“There’s a balance between the effort put into teaching and into research,” he said. “Research affects reputation and ranking so it’s important but we are constantly challenging the vice chancellor about whether improving research is the right thing to do when cash is limited.”

Aside from student fees and research, options for “decent revenue raising”, as one governor puts it, are limited. Avenues such as entrepreneurship and Transnational Education (TNE) come with risks.

“Lots of the other activities look shiny and feel interesting but they don’t actually add up,” said one governor. “You might decide that you are going to do a spinoff company and it’s going to cost you £5 million for five years to get it set up but then it might make £10 million a year. But if you’ve spent £25 million putting it together it is going to have to be very successful in those first few years to get your money back.

“It’s the same with TNE, the turnover might be £5 million a year but if it’s costing you £4.8 million, there may be an easier, less demanding way to get yourself £200,000, such as recruiting another 20 students. Or it may be that the diversification is worth it.“

This governor sees the board’s role as steering and supporting the management to work out which of the potential pots of money is worth going for.

“You very often see universities going in for half a dozen partnerships under one vice chancellor and then you get a new VC and they chuck half of them out the door because they want to do something else with their energies,” she said.

If the finances are available, there is the option to invest in projects that will bring in income downstream. The governor of a new university cites plans at his institution to open a campus in another city and a possible medical school. He also feels more cooperation between cash-strapped universities could be advantageous.

“I don’t think we cooperate with our neighbours enough,” he argues. “It might help to increase student choices, cut down on duplication, enable joint bids and bring economies of scale. In this kind of environment, I do think we need to be more cooperative to try and bring benefits to students.”