What happens if a university needs bailing out?

University finances have been in the news this year. As the travel ban on Chinese students was announced some very big financial costs were estimated – since moderated due to the third-country quarantine exception, but still estimated to be well over $1 billion, at least in temporary cash flow issues.

In worst-case COVID-19 scenarios there would be travel bans from many international student source countries, along with campus closures that could require refunds or compensating classes for affected domestic and international students.

While I doubt the worst-case scenario will become reality, the ‘rivers of gold’ era (as Simon Birmingham once described it) for university revenue is over.

Even before COVID-19 international student demand seemed to be softening, while remaining high by historical standards.

On top of this, all public universities are dealing with a decline in the real value of their bachelor-degree student funding, and some are struggling to maintain domestic student numbers due to soft demand.

Cutbacks have been reported at many universities including Wollongong, La Trobe, Sydney, Macquarie, Monash, and in the last day the University of Tasmania.

Fortunately, the universities that are most exposed to the China market are relatively wealthy. They should be able to deal with short-term liquidity issues from a mix of reduced and delayed spending, drawing on reserves and perhaps bank borrowing. But what if a university faces more serious difficulties?

There is provision in the funding legislation, the Higher Education Support Act 2003, to deal with liquidity problems. Section 33-40 enables the minister to make cash advances for ‘such purposes as the minister determines’. The Commonwealth Grant Scheme Guidelines go into more detail about that these purposes might be:

a) to assist providers with the cash-flow implications of restructuring;
b) to implement adjustment arising from the specific effects on grants of Commonwealth
policy change;
c) to rationalise staffing levels, courses and infrastructure both within and between
providers;
d) to help secure genuine productivity improvements in the area of workplace reform;
e) to implement explicit decisions to restructure the educational profile of a provider; and
f) to achieve such other purposes as the Minister may determine.

While the University of Tasmania is doing some restructuring, COVID-19 type problems were not what was envisaged by section 33-40. The real danger is that universities that have essentially sound long-term business models cannot withstand a temporary but big hit to their revenues.

A previous minister capped total section 33-40 advances at $25 million. That would not be enough to deal with a broad sector crisis.

Importantly, too, this is a loan, not a grant. The money needs to be paid back, via lower subsequent grants, over a period of up to three years after the year in which the advance is paid.

Although not intended as an emergency measure, there is provision under section 41-10 of the Higher Education Support Act 2003 to make grants ‘to support structural adjustment’.

I don’t have any information that suggests an application for funding under section 33-40 has been made or is being considered. But 2020 is already rich in outlier events, so I thought it might be worth a FYI post.

 

3 thoughts on “What happens if a university needs bailing out?

  1. Some previous advances on universities’ recurrent grants have been conditional on the university submitting an approved financial restructuring plan, and at least 1 university had to accept a departmental officer effectively joining its budget committee.

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