What could the government do to stabilise university finances?

There are some pretty high figures circulating about possible university losses due to COVID-19. I have seen no supporting evidence to justify the estimates, and the top-of-the-range numbers are implausible. Nevertheless, 2018 financial data shows many institutions with thin operating margins. We have grounds for concern about how they would manage a major hit to their finances.

On the revenue side, we have actual or potential losses from international students who never arrived, international students who may have gone home, domestic students withdrawing prior to the census date, and domestic students claiming student contribution refunds and HELP remissions because their course delivery methods changed.

On the cost side, universities have had to finance quick transitions to online education for students and working at home for staff, as well as some universities offering students financial support.

This post summarises things that the government can do within existing or announced legislation to stabilise university finances. I have blogged about some of them before and will note them concisely here. Of course, other policies supported by new legislation are also possible.

Cash flow

Funding for Commonwealth-supported students is paid fortnightly based on estimates of university entitlements. These entitlements are often revised during the year, including in April or May after the first census date, to better reflect actual enrolments to date.

If  students withdraw prior to the census date expected entitlements will be revised down. Legally, total payments for the year cannot exceed equivalent full-time student load multiplied by the relevant Commonwealth contribution.

However, the law does not require any particular schedule for paying eventual entitlements. Under section 164-5 of the Higher Education Support Act 2003 the ‘time and manner’ of payments is determined by the government.

The fortnightly payments would need to cease when the total estimated entitlement is reached. However, presuming non-catastrophic declines in student numbers fortnightly payments could continue at previously budgeted levels for months while we work on other solutions.

Under section 33-40 of the Act there is a bail-out provision that allows the minister to lend money to universities, with repayment via reduced grants over a period of up to three years.

As I said in my blog post on section 33-40, there is a problem in that total lending is currently capped at $25 million. The policy envisaged a university in trouble, not a sector. But the minister could create a new legislative instrument with a higher amount.

Increasing payments in 2021

Borrowing against the future would be more attractive for universities that believe there will be more money available in 2021.

This could be done without any special university bail-out package. Academic disruption during 2020 and the COVID-19 recession will combine to generate more student demand than previously expected in 2021. What we need to do is change policies so that universities are paid to deliver these additional student places.

Without a change to performance funding policies, the amount of money on offer will decline and no university will meet all its performance targets. It would be farcical to penalise universities for problems caused by COVID-19 and government decisions. 

The government could postpone performance funding targets for a year and increase maximum grants by previous announced population levels.  This could easily be included in new funding agreements. These are needed in any case to implement policies for swapping student places between qualification levels and universities. 

The performance funding money has already been approved so the minister could make this decision easily. However, even with performance funding universities will still – unless we enter a deflationary period* – face real cuts to their total annual Commonwealth contribution payments through the Commonwealth Grant Scheme. Something bigger is needed.

Of course, I think we should just go back to demand driven funding. But it would be possible to increase maximum basic grant amounts in university funding agreements. This would have to be a multi-year arrangement to fund the pipeline of additional students (first year students become second years, second years become third years, etc).

While higher maximum basic grant amounts would help most universities there could be exceptions. It is not obligation-free money; universities have to deliver student places. While overall demand for student places should increase in 2021, the University of Tasmania, and to a lesser extent universities in South Australia and the Northern Territory, have demographic trends running against them. It might be hard for these universities to recruit enough students to fill an increased funding allocation.

Non-repayable bail-out funds

Higher education institutions are not legally blocked from receiving the JobKeeper payment.

However the at least eleven universities with over $1 billion in annual revenue would have to experience a 50 per cent decline in revenue over some relevant timeframe (probably a teaching period), and the other universities a 30 per cent decline in revenue.

I doubt that the revenue drops will be that large. La Trobe University says its income will fall by 14 per cent, well short of the 30 per cent it needs. The University of Melbourne and the University of Sydney are reporting revenue drops of about 20 per cent, much less than the 50 per cent they need. So although universities are not disqualified from JobKeeper funds they are not likely to meet the revenue-loss eligibility criteria. 

A more left-field idea, in that it is well outside the intent of the legislation, is to use the ‘other grants’ provisions of the Higher Education Support Act 2003 (division 41).

The minister can increase the maximum total amount of other grants (section 41-45). He also has flexibility to rewrite the guidelines. These decisions could be over-turned by either the Senate or the House of Representatives, but that is unlikely in the circumstances.

Some possible options include:

  • increasing equity funding;
  • taking over funding of some existing university capital works via the capital development pool;
  • grants from a restored diversity and structural reform fund to help universities adjust to living with COVID-19 or its consequences;
  • making many more universities ‘national institutes’.

All these could be time limited, to help universities get through a period of unexpected disruption.

Note: This post has been updated to reflect information that was not available at the time it was written.

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*If there is deflation, funding is not indexed down: section 198-10(2) of HESA 2003.

One thought on “What could the government do to stabilise university finances?

  1. What about 100+ independent providers (non-university and non-government owned TAFE, NIDA etc) and the financial implications for them? Why are we focused on government owned universities – given some are already in a deficit and if they were IHEPs a certain regulator would be having conniptions but no one seems to worry about government owned universities operating in the red (assuming that a government will eventually bail them out). (Though I did have an university chancellor correct me at a university regulatory conference when he heard me say that no university had ever gone under – her corrected me and said one had but that was hidden with a name change) Could the universities and other IHEPs cope with extra students if any of the IHEPs fail?

    Like

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