The University of Otago is heading into deep debt, for the first time in modern history — and its balance sheets are facing greater scrutiny by the university financial watchdog, the Tertiary Education Commission. Mary Williams dives into the financial maelstrom.
She has access to annual accounts dating as far back as 1990 — they are all debt-free. She also wonders, but doesn’t know, if there has ever been any borrowing by the university "since the time the clock tower was built".
The tower was built in 1878. The university has never had debt; and has no institutional experience, therefore, of managing debt.
The capital programme is the university’s expenditure on building works — new buildings and refurbishments to buildings. This significant expenditure is additional to the university’s day-to-day running costs in its operating budget. The university’s 2023 operating budget, which hid the extent of a major savings target to address the operational budget hole, explains that "investment in new and refurbished buildings and equipment will increase the university’s debt to $217.6million and related financing costs to $5.9million".
Combined, the university’s capital expenditure and its operating budget shortfall equals a giant throbbing debt headache for the university’s management.
"Disappointing" is the word chancellor Stephen Higgs uses to describe the University of Otago’s financial performance last year. Introducing Otago’s 2022 annual report, he stresses that the plan to end 2023 with a deficit is "clearly not sustainable" and the university must achieve levels of surplus required by the Crown. Quizzed by the ODT, acting vice-chancellor Prof Helen Nicholson agreed: "We need to become financially viable in the longer term." Balancing the books longer term cannot just be an aspiration. It is a necessity for the institute’s survival — and a regulatory requirement. Interviewed for this article, Minister of Education Jan Tinetti told the Otago Daily Times: "Universities have the autonomy to determine how they manage their financial performance, course offerings and organisational structures. As minister, I do not get involved in any such decisions."
She added: "The Education and Training Act 2020 requires university councils to ensure the institution operates in a financially responsible manner that maintains its long-term viability."
How, and when, the university will sort out its finances is unknown. A strategy, Pae Tata — Strategic Plan to 2030, is promised after the presiding council’s June meeting. Prof Nicholson has promised it will lay out "detailed steps". Prof Nicholson told the ODT: "When we announced the need to respond to the emerging financial situation last month, we indicated very specifically that we need to act now, because if we did nothing we would face a potential liquidity crunch late next year."
The plan is eagerly awaited by staff who, as the ODT reported earlier this week, are "baffled" and "scared".
As also reported by the ODT, the university produces long-range financial forecasts, but has not been able to direct the ODT to a financial plan managing its risks. A deep dive into the university’s finances has, however, uncovered the gravity of these risks and answers key questions.
Is the university heading into significant debt this year? Yes. When will this start to happen? In a matter of weeks. Is debt normal for the university? Absolutely not.
The university has known for years that it was heading for borrowing, due to its planned capital expenditure on buildings. In late 2018, the university lodged an application to the Tertiary Education Commission to more than double its "borrowing consent" to $405million — from a prior limit of $170million. The university has now secured bank borrowing facilities of $400million. It can’t borrow the whole amount, however. The university funder and watchdog, the Tertiary Education Commission (TEC) is allowing the university, for liquidity-related reasons, to borrow up to $330million.
In response to the university’s financial woes, the ODT has also uncovered that the TEC has stepped up its monitoring of the institute. The TEC has a responsibility to monitor universities’ financial risk management and compliance with the Education Act and uses a framework of performance indicators to do this, including levels of surplus. "Institutions need to make a 3% surplus to be considered low risk," TEC deputy chief executive, delivery Gillian Dudgeon said. The University of Otago is clearly not "low risk", therefore.
In certain circumstances, failure by a university to achieve a surplus can be a trigger for additional reporting or monitoring to the TEC. This is now happening to the university. Ms Dudgeon told the ODT due to the university’s "current and forecast financial situation" the TEC will be "undertaking greater engagement and monitoring for the foreseeable future, as TEC considers that the risks to Otago have increased".
"Over the medium term, TEC’s expectation is that universities achieve a 3% surplus or higher. This is a long-standing expectation to ensure universities are financially sustainable, can maintain assets and are well placed to manage financial shocks such as Covid-19. If a university is reporting a deficit, we would expect it to put in place a plan to return to a financially sustainable position over the medium term."
As revealed by the ODT earlier this week, the university’s operational budget deficit is forecast to be $22.5million at the end of 2023, predicated on achieving the $25million savings target, decided last November but omitted from the university’s budget. Vice-chancellor David Murdoch, at present on sick leave, also failed to reveal the size of the operational budget hole, including its demanding savings target, in a staff meeting in February when he gave a financial warning.
Speaking about the 2023 operating budget deficit, Prof Nicholson has said that being in the red for several years "is not tenable". However, her team says this is the reality. Miss van Turnhout says achieving a surplus by the end of 2024 "will not be possible to turn around in such a short space of time".
She adds that making savings quickly through changes to university activity cannot happen: "It takes time to adjust the activity delivered by the university for teaching and research and as most of our expenditure relates to staff, we are not in a position to forecast a return to surplus in 2024".
The university’s financial statement to the end of March this year says achievement of the planned $25million savings target from the $834million operating budget is "at risk".
Miss van Turnhout says "further targets will be set" for savings — but it is "most likely these will impact 2024 and 2025".
More than half the university’s costs are salary-related, and the university has said "several hundred" jobs are likely to be impacted — but no decisions have yet been made, beyond the call for voluntary redundancy volunteers, which closes next week. If there are more redundancies to come, they are likely to help 2024’s budget more than the 2023 situation.
More than three out of every four dollars of the university’s income comes from, or is controlled by, the government — but the university’s operating pickle is not significantly helped by a 5% hike in the Government’s funding of universities from 2024, announced in the May Budget. Prof Nicholson said this would make "little difference" to Otago’s financial position — only about $4million.
The university’s capital expenditure was already $24.8million in the first three months of 2023. The building works are impossible to stop entirely, the university says. Some buildings are nearing completion or completed, such as Te Rangihīroa, the new hall of residence. Others, however, are major projects mid-build — some barely out of the ground. The foundations of the health campus building in Christchurch have been dug. As well as investing in new builds, the university is refurbishing its older building stock. Two-thirds of university buildings are more than 40 years old. Refurbishment includes remedial work to comply with fire and seismic building regulations.
The building works also include strategic investments needed. Miss van Turnhout said: "We need Te Rangihīroa, the new college, in preparation for the 2025 boom in school leavers." The college will deliver 450 more beds.
The university is considering, on an ongoing basis, mitigating actions to reduce the cost of the building works, such as to "delay, deprioritise, slow down, and change scope". Miss van Turnhout said: "One of the challenges since Covid is constantly reprioritising the capital programme."
TEC boss Ms Dudgeon told the ODT: "In general, universities are expected to fund capital programmes through free cash flow, cash reserves and, if needed, commercial debt. The mixture of funding sources ultimately deployed is based on a university’s operating context and overall financial performance." However, she added: "It can be difficult for universities to finance sensible capital programmes if a surplus is not achieved. In some instances, a surplus much larger than 3% may be required to fund a sensible capital expenditure programme."
As homeowners with mortgages know, borrowing to fund a building is normal and manageable if there is the means to pay back the loan. Right now, the university is not managing within its means. Could a combination of large capital expenditure, plus borrowing to meet operational expenditure, ultimately risk the university’s liquidity — its ability to function?
University director of strategy, analytics and reporting, David Thomson, told the ODT: "Like any not-for-profit we need to operate in a business-like fashion. If we don’t generate income, that balances the books and creates a surplus, our ability to operate long term is compromised."
Ms Dudgeon says the TEC will be seeking "regular updates on the university’s progress and financial position". Prof Nicholson, asked to respond to the extra monitoring, said it was something the university had "routinely done" at other times in the past and the university would keep the TEC "appropriately appraised of the situation and the steps we are taking to manage it".
