Our Universities: Backing Australia's Future - Setting Firm Foundations: Financing Australian Higher Education

46 The Commonwealth monitors the financial situation of higher education institutions by assessing their audited financial statements. The sector-wide analysis presented in this section is based on the aggregate financial data extracted from the published financial statements for 2000 of the 37 publicly funded universities, together with The University of Notre Dame, Australian Maritime College and Batchelor Institute of Indigenous Tertiary Education. In the case of some dual sector institutions that do not report financial information on higher education activities separately, the financial data provided to DEST as part of their profile submission has been used.

a. liquidity and financial stability measures

47 The principal measures used to assess liquidity and financial stability are operating margin, the current ratio of assets over liabilities, borrowings, cash and investments and net assets. A description of each measure is summarised in Table 2.

table 2. measures for assessing liquidity and financial stability

measure	explanation
Operating Margin	This is similar to profit margin. It expresses the surplus or deficit as a percentage of total revenue. A positive percentage for any given year indicates that total revenue exceeded total expenditure for that year.
Current Ratio	The current ratio is a liquidity ratio. It measures the ability of the institution to meet its short term obligations. A current ratio of less than 1.0 is used as a flag indicating potential liquidity risk. The measure is calculated by dividing current assets by current liabilities.
Borrowings	This relates to external borrowings of institutions. Borrowings are classified under current and non-current liabilities.
Cash and Investments	This refers to cash and mostly near liquid investments, although some are restricted investments. Cash and investments are reported in the balance sheet under current and non-current assets.
Net Assets	This highlights total net investment in institutions. It represents total assets less total liabilities.

48 The general financial position of the higher education sector as a whole, as reflected in 2000 audited financial statements, was sound (Table 3).

table 3 summary of financial status indicators, 1999 and 2000

year	operating margin	current ratio	revenue (billion)	operating surplus (million)	net assets (billion)	cash & investments (billion)	borrowings (million)
2000	3.4%	1.5	$9.3	$321	$20.0	$4.4	$426
1999	3.4%	1.8	$8.8	$286	$18.8	$4.4	$364

49 Operating margin needs to be considered in the proper context. Universities are not for profit organisations. Nevertheless, it is a useful summary measure of the financial performance of universities. The sector-wide operating margin has remained positive for the 1997-2000 period (Figure 2) and was unchanged between 1999 and 2000. Higher education institutions continue to earn additional revenue from non-government sources and the majority has contained expenditure within the limits of available funds. Ten institutions recorded negative operating margins in 2000, attributable to a combination of limited revenue growth and a general increase in costs. In the case of two institutions the deficits were attributed to changes in accounting policy taking effect in 2000. In 1995 there were seven institutions that recorded negative operating margins.

figure 2. operating margin, 1996-2000

50 The sector-wide current ratio continues to be significantly higher than the threshold of 1.0 (Figure 3). In 2000, current assets were 1.5 times current liabilities. While the majority of institutions continue to perform strongly and maintain sufficient levels of liquid assets to meet current liabilities, there were five institutions with a current ratio of less than 1.0 at the end of 2000. This compares with five in 1999, six in 1998 and ten in 1997. However, a number of institutions classify a substantial portion of their investments, including those financial instruments that are readily convertible, as non-current assets resulting in a reduction of their current ratio as measured by convention. The effect of this practice is to understate the strength of liquidity. In addition, accounting policy changes at some institutions have led to grants made in advance being classified for the first time as current liabilities, with a consequent reduction of their current ratios.

figure 3. current ratio

51 Universities continue to have low levels of borrowings even though the level of borrowings has been increasing in recent years (Figure 4). In 2000, the borrowings for the sector were $426 million. This was $61 million (17 per cent) higher than the previous year. As would be expected, there is considerable variation in patterns of borrowings across the sector. In 2000, fifteen institutions had no external borrowings, ten had borrowings totalling less than $10 million, eleven had borrowings of between $10 million and $25 million, and the remaining four had external borrowings of more than $25 million.

figure 4. external borrowing

52 The sector’s net assets increased from $18.8 billion in 1999 to almost $20.0 billion at the end of 2000, an increase of 6 per cent. There is considerable variation across the sector in the value of net assets, reflecting such factors as the age of the institution and the size of its operations. Five of the oldest universities had assets of over $1 billion each at the end of 2000, while small and relatively young institutions, had net assets of around $45 million.

53 The debt to equity ratio, which measures the proportion of net assets committed to the repayment of borrowings, has remained at 2 per cent for the past few years, including in 2000. This is very low in comparison to the private sector as would be expected given the level of universities’ capital assets. In 2000, the sector had almost $11 billion in buildings and a further $2 billion in library assets.

54 In addition to the substantial capital assets, the sector also has substantial liquid assets as measured by cash and investments. The cash and investments of the sector totalled $4.4 billion at the end of 2000. This was more than 10 times the size of external borrowings.

55 Cash and investments increased substantially by $800 million between 1996 and 1998 and have remained at the same level during the past three years (Figure 5). The net assets of the sector have increased substantially during the past two years, by $900 million in 1999 and $1.2 billion in 2000. This reflects the continued high levels of investment by the sector in capital assets.

figure 5. cash and investments

56 Net capital expenditure (calculated as capital expenditure less capital asset sales) measures the investment in capital assets financed from operating surpluses, internal reserves and external sources (borrowings, grants etc). It has been substantial during the past five years, totalling $4.4 billion over the period. Net capital increased in 1999 and 2000 (Figure 6).

figure 6. net capital expenditure

b. revenue and expenditure trends

57 Sector revenue in 2000 reached $9.3 billion, an increase of 5.6 per cent over 1999. Sector expenditure in 2000 was $9.0 billion, an increase of 5.4 per cent over 1999. Thus in 2000, the growth in revenue was marginally higher than the growth in expenditure, reversing the trend of the previous three years (Figure 7).

figure 7. revenue and expenditure

Note: The revenue and expenditure figures in Figure 7 exclude ‘deferred government superannuation income’ from revenue and ‘deferred employee benefits’ from expenditure reported by institutions in their financial statements. These revenue and expenditure items offset each other, so excluding them does not have any effect on the overall result. Although they are not meaningful in this context, these items are recorded in institutions’ operating statements to reflect any increases or decreases in their unfunded superannuation liabilities.

58 Over the period 1996-2000, sector revenue increased by $1.4 billion while expenditure increased by $1.6 billion (Figure 7). Hence, the operating result for the sector declined from around $473 million in 1996 to $321 million in 2000 (before abnormals).

trends in revenue by source

59 Between 1996 and 2000 revenue from fees and charges grew from $1.1 billion to $1.7 billion or from 14 per cent to 18 per cent. The major component of fees and charges is overseas student income.

60 Overseas student revenue increased by $153 million (or 19 per cent) in 2000 (Figure 8). Since 1996, revenue from overseas student fees has increased by more than 75 per cent. Three institutions, RMIT University, Central Queensland University and Curtin University of Technology, had overseas student revenue contributing to more than 20 per cent of their total revenue. A further 15 institutions derived more than 10 per cent of their total revenue from fee paying overseas students in 2000.

figure 8. revenue from full fee paying overseas students

61 Revenue from domestic postgraduate fees grew from $89 million (1.1 per cent) in 1996 to $192 million, or 2.1 per cent of revenue in 2000.

62 Revenue from domestic undergraduate fees has also been growing, with 16 institutions offering undergraduate fee paying courses generating total revenue of $36.7 million in 2000 (DEST 2002a), compared to 10 institutions generating $10 million in 1998. Investment income accounted for a further $322 million (or 3 per cent) of sector revenue in 2000.
expenditure analysis

63 Staff salary and related costs declined marginally as a proportion of total expenditure in 2000. They accounted for just under 59 per cent of operating expenses in 2000 compared to 62 per cent in 1996 (Figure 9).

figure 9. expenditure analysis

64 A number of universities have invested in the development of more sophisticated systems and models to better enable them to measure the costs associated with their activities for both strategic planning and budgeting purposes.

c. some financing pressures affecting australia’s universities

65 Since the mid 1980s the higher education sector has grown at a rate faster than the level of Commonwealth funding for the sector. Operating grant funding per fully funded student place fell in constant prices from $12 862 in 1983 to $11 597 in 1991 (some 10 per cent). It rose again between 1991 and 1998 to $12 150 and has since stayed relatively stable but still some 6 per cent below the level of 1983.

66 The Commonwealth’s indexation arrangements for operating grants since 1995 have been set in the context of enterprise level bargaining on wages and productivity improvements. Full wage indexation has not been considered appropriate. Instead, since that time the movement in the national Safety Net Adjustment (SNA) has been used for the wage component. The major component (75 per cent) of the Cost Adjustment Factor is the SNA. In addition the fall in the Australian dollar has increased non-wage costs, substantially so in libraries.

staff cost pressures

67 During the last Enterprise Bargaining (EB) round the Government introduced the Workplace Reform Programme, which delivered an additional 1.5 per cent of operating grant (that is, 2 per cent of the notional salaries component of the grant). This was provided subject to a university’s EB Agreement fulfilling at least 9 out of 14 specified reform criteria. This was a one-off addition to universities’ funding base. No provision has yet been made for the next EB round beyond continuation of the current yearly SNA supplementation arrangements. The outcomes of the last EB round have typically seen salary costs increase between 12 per cent to 14 per cent over three to four year periods. A number of submissions suggest that it is unlikely that further productivity improvements alone will be sufficient to meet the full cost of future wage supplementation.

68 A more detailed discussion of workplace issues will be presented in another paper produced as part of this Review examining governance and management issues.

other pressures

69 Between 1994 and 2000 the student:staff ratio increased by over 23 per cent, from 15.0:1 to 18.5:1. Some of this can be seen as productivity improvement through reduction of small unviable units of study, better use of marginal capacity, shedding of unproductive staff and better use of technology. However, a large number of small units remain. Allowing for some coding noise, around 20 per cent of units currently have fewer than five students.

70 All institutions have been looking at alternative revenue sources to alleviate funding pressures. However, some institutions are better placed than others to attract such funding. There is a range of intrinsic disadvantages that may affect an institution’s capacity to compete, raise non-government revenue and meet the community’s reasonable expectations. For example, a number of institutions are disadvantaged because of their location, size and history. They may have modest capacity to compete for fee-paying students, are located in areas of low demographic growth and low demand for higher education and have limited accumulated assets for potential income generation. Some institutions are subject to significant intrinsic input cost disabilities which are beyond the control of management, including labour, capital and utility costs. These are normally the result of the location of the institution. Several institutions are exposed to higher student support costs as a result of their student profile which includes high proportions of low socio-economic background students or students with lower entry scores.

investment in infrastructure

71 The University of New South Wales argues for significant investment across the sector in infrastructure over the next five years:

72 Several other submissions pointed to the need for universities to maintain their investment in high cost infrastructure, such as libraries and ICT, to maintain standards and remain competitive both nationally and internationally.

Higher Education Review Process

Setting Firm Foundations: Financing Australian Higher Education

3. financial status of Australia’s higher education institutions