Can a block grant system work on lower per student funding rates?

In recent posts I examined how various average teaching costs compared to the proposed new student funding rates. Average costs provide a rough guide to the decisions facing universities. Fortunately, the cost data has average costs for each field in each university in the sample. This detail offers a more nuanced understanding of how the new funding rates will affect universities.

The published cost data is from 32 universities and covers 20 fields of education. Not every university offers courses in all fields. In total, 551 fields are examined for profits and losses.

This analysis requires methodological assumptions, which are discussed in more detail at the end of this post. In summary, these are no grandfathering of existing students (to better understand long-term incentives) and that teaching and scholarship costs will increase by 6 per cent between 2018 and 2021. The universities are not identified and so a regional loading cannot be added, but if included in the analysis it would slightly decrease the number of loss-making fields.

As expected, given a reform that lowers revenue per student in many disciplines, the proportion of fields reporting profits drops. It goes from two-thirds in 2018 to just over half in the new system, with lower margins on fields that remain profitable.

The number of fields that breakeven, defined as costs within $400 up or down of the funding rate, goes up slightly. The number of fields losing money increases more significantly from 28 to 41 per cent.

Adjusting funding rates is not inherently a bad idea. Various accidents of policy history have left imbalances worth attention. It looks like a problem when 25 of 32 universities offering management and commerce courses lose money on current funding rates. It seems anomalous that universities earn much more for communications courses than pedagogically similar humanities courses.

But I worry that a technocratic plan to rationalise funding categories, to reduce apparent over- and under-funding, will disrupt a system that was designed to work, and has been made to work over several decades, around a much more approximate pricing system.

In the current funding system’s original design, which dates back to the early 1990s relative funding model, a mix of profits and losses did not matter. Policymakers knew that costs by field would vary between institutions, as the recent cost data confirms. The original relative funding model rates were used to calculate an overall block grant. Swings and roundabouts were expected. Universities would make money in some fields and lose it in others. What mattered was that total block grant funding was sufficient to fund the university’s mission.

Despite university complaints about Commonwealth funding, there was enough of an overall funding surplus in the Commonwealth-supported student funding rates to make the system work for teaching. A mission approach to domestic teaching, which accepts financial swings and roundabouts, explains why domestic enrolments grew in fields that were loss-making.

But cutting thousands of dollars out of the per student funding rates in some fields, leaving such a large proportion of disciplines in loss, risks leaving universities with too little money for the swings and roundabouts needed to make a block grant system work.

A hardheaded commercial approach would ruthlessly close loss-making campuses and courses. This is not the university default position; mission comes first. But in the face of a desperate financial situation mission-contradicting closures might be the only option left.


Methodological issues

Grandfathering

Students who would be otherwise have to pay higher student contributions will be grandfathered under the Tehan package. On my estimates 42 per cent of continuing students will be grandfathered. For the purpose of this post, which aims to highlight the longer-term consequences of the proposed reforms, I am assuming that grandfathering does not occur.

Rate of cost increase

An important issue in determining profits and losses is the rate of expected cost increase from the 2018 cost analysis. In my analysis to date I have estimated costs at 6 per cent higher in 2021 than 2018. This is slightly below annual cost increases in recent years. But with inflation low and universities busy slashing costs by delaying pay rises or even cutting pay it could be argued that this is too high.

But I am not sure that these savings will be reflected in the next teaching and scholarship cost study. This is because academic staff with on-going and fixed term contracts, most of whom are lecturers or above in the academic hierarchy, are taking on teaching work previously carried out by lower-ranked and lesser-paid casuals who will no longer be employed.

I am continuing the 6 per cent estimate as, at least in an accounting sense, teaching labour costs are likely to increase. But given that future costs can only be estimated, the chart below includes a 3 per cent cost increase, as well as a 6 per cent increase, to compare results under different cost increase assumptions. Over the longer run, we can expect universities to reduce teaching costs by using more junior staff.

Regional loading

Another issue is the regional loading, which assists universities with regional campuses and students. While its medium-term fate is uncertain, other programs are likely to boost payments to regional universities. As I will outline in more detail in a separate post, this loading reduces teaching losses at regional universities. Because regional universities are not separately identified in the detailed average cost data, the reported data understates the revenue available to universities with significant regional operations.

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