by JAMES GUTHRIE
The government recently released the public sector universities financial summary covering 2020 (CMM, October 29)
Unis as big business
Before the pandemic, in the decades up to the end of 2019, vice-chancellors treated Australian public sector universities as commercial businesses. Their business model relied on growing international student numbers ‒ and fees ‒ to fund operations, research and infrastructure. This model had everything to do with income and little to do with quality education.
Then came COVID-19, and with a predicted significant reduction in international student fees over the medium term. Media reports from mid-2020 projected an overall sector-wide revenue decline of $4.8 billion for 2020, and actual results show a decrease of $1.9 billion or 5.1 per cent from 2019. So, in 2020, when the pandemic hit, the drop in international student income was portrayed by the university lobby, vice-chancellors and many commentators as a significant financial crisis. According to the Australia Institute up to 40,000 university positions have been lost.
This drop-in expected international revenue continues. However, it has become a smokescreen for other, more fundamental problems with how the higher education sector engages with its workforce, the economy and broader society.
The following Table 1 summarises 2019 and 2020 revenue for the public sector universities in Australia. Total revenue for the sector in 2020 was $36.5 billion. A reduction in investment revenue was the primary driver of revenue decline across the sector, with a total investment income of $927.4 million reported in 2020, down $1.3 billion or 57.7 per cent from 2019.
Table 1: Summary of 2019 and 2020 Revenue
|Australian Government Grants||12,122,312||11,976,440||145,872||1.2%|
|Australian Government Financial Assistance||18,186,283||17,782,618||403,665||2.3%|
|State and Local Government Financial Assistance||763,738||725,351||38,387||5.3%|
|Upfront Student Contributions||455,532||459,066||(3,534)||-0.8%|
|International Student Fees||9,222,983||9,978,794||(755,811)||-7.6%|
|Other Fees and Charges||1,454,207||1,814,300||(360,093)||-19.8%|
|Consultancy and Contracts||1,628,787||1,567,755||61,032||3.9%|
|Other Income *||2,012,149||2,000,053||12,096||0.6%|
|Total Revenues from Continuing Operations||34,651,093||36,519,249||(1,868,156)||-5.1%|
* Other income includes royalties, trademarks and licenses and the share of net result of associates and joint ventures accounted for using the equity method.
In reviewing revenue, we can see the Australian government grants did not even keep up with inflation for 2020. Also, local student fees increased and note the accounting trick of adding together government and student fee HELP money and call this Australian government financial assistance.
The state they are in
The current financial strength[i] of the public higher education sector and most individual universities can be judged partly by the accounting numbers. Short term reactions and tactical responses currently in play have mainly focused on cutting staff costs. Each year, the financial reports issued by universities confuse rather than explicate their financial position – notwithstanding the requirement to comply with Australian Accounting Standards (AAS). Required statements for public sector universities are the income statement, comprehensive income, statement of financial position, statement of changes in equity and the statement of cash flows. All except the statement of cash flows can be used by individual universities to confuse the flow of funds.
Universities receive money from the Australian government in the form of financial assistance grants, domestic student fees paid by income-contingent loans, research and consulting income from government and industry, fees paid by international students, research commercialisation and a range of commercially oriented business ventures.
In 2020 the amount of money flowing to Australian public sector universities was estimated to be $36.6 billion. Their net asset holdings stood at $61 billion, about the same as 2019. Many are huge businesses with annual revenues of over $2 billion and substantial net asset holdings. The financial position of universities remained strong throughout the 2020 reporting period, with net assets of $62.7 billion reported across the sector as of 31 December 2020, up 1.9 per cent from $61.6 billion in 2019. Total assets across the sector were $95.0 billion as of 31 December 2020, increasing from $90.4 billion in 2019. Property, plant and equipment represented the most prominent component at $58.5 billion, followed by investments at $18.2 billion. For instance, in 2020 University of Melbourne reported net assets at $6.9 billion, and The University of Sydney reported $4.9 billion. In 2020, ten universities will have revenues above $1 billion. Several show signs of operating as financial corporations, with financial assets outsourced to investment bankers.
The first gap between rhetoric and reality is that universities financial positions are poor
From the information above, now turn to compare the rhetoric and reality of Australian public sector universities in contemporary times. While the rhetoric relies on claims of a loss of income due to the pandemic, the reality is that after paying all operating costs, including employee wages and salaries, total cash flows from operating activities show surplus cash from ongoing operational income (e.g., government funds, student fees and investment income). All universities were in funds surplus with government and students paying cash and operating activities (excluding accruals) paid in cash to suppliers and employees.
The second gap is job losses
The second gap between rhetoric and reality is that only 17,000 employees lost their work. The reality is that up to 40,000 have lost their employment to date. Analysis of accounting for employees highlights universities’ inconsistent disclosures (Guthrie, CMM October 4 2021a). Nearly all universities are registered in their state or territory and should be treated as public sector organisations for staffing disclosure rules. This issue of accounting for employees is also relevant in determining how many people have lost employment in Australian public sector universities since the outbreak of the pandemic, (Guthrie, CMM October 4 2021).
The third claims are uni financials are not strong
The third gap between rhetoric and reality is that the financial position of most universities is not strong. The reality is that universities are using an unusual form of accounting called underlying operating results for the year. This is not an accounting statement for legal reporting, but one used by vice-chancellors to justify the termination of employment for many staff. These accrual financial statements use business accounting principles that should not apply in public sector organisations like universities. Accrual numbers can be manipulated through depreciation and other accrued expenses (Guthrie, 1998).
The fourth ignores unis are run as businesses
The fourth gap between rhetoric and reality is that public sector universities are registered under the Charities Act and are not-for-profit organisations. The reality is that universities are run like commercial businesses and hide behind commercial in confidence. Public sector universities hold significant cash and investment portfolios. There was significant growth in cash and investments reported by most universities. Total cash and investments of $24.6 billion were up 9.8 per cent from $22.4 billion in 2019. For instance, the University of Melbourne had $3.5 billion in cash and investments. Therefore, most of these financial assets would have been in the form of cash surpluses from past activities. However, any income from these investments appears to be ring-fenced from operating activity. Then we can only assume the income goes back into further investments. This looks a bit like a finance business in that it has a range of derivatives, currency swaps and cash holdings, and marketable shares (Guthrie, CMM August 31). For instance, the Australian National University’s (ANU) financial statement notes financial assets in primary shares and other financial instruments totalling about $1.7 billion (Guthrie, CMM October 12).
Using accrual depreciation makes little sense
The fifth gap between rhetoric and reality is that land and buildings are valued at a fair market value of about $50 billion. The reality is that most of these land and buildings were gifted to universities, and therefore accrual depreciation makes little sense. There was a 4.9 per cent increase in property, plant and equipment across the sector in 2020. This was driven by recognising service concession assets (public-private partnerships for building student accommodation and commercial property) following new accounting standards. Payments for property, plant and equipment were $3.3 billion in 2020, down 27.5 per cent from $4.5 billion in 2019. However, note the significant building works still ongoing and announced in 2022 of many billions for more. Many universities continue to undertake significant infrastructure development at the cost of billions of dollars.
The rhetoric of high employee costs ignores staff are the critical assets
The sixth gap between rhetoric and reality is that employee expenses are too high. However, the reality is that the critical assets of public sector universities are its people, who research, teach and provide operational support. Employee expenses are a cost for universities with a total of $19.2 billion reported in 2020, excluding payroll tax. This represented a substantial increase of 5.4 per cent over the $18.2 billion reported in 2019 and was driven by termination payments made to staff. A Senate Select Committee on Job Security (2021: 161) has painted a picture of the university sector as “dominated by insecure work and exploitation”. “Casualised staff are typically young academics undertaking a PhD or have just completed one and face years working as a casual tutor or research assistant with no job security. This is after studying for a minimum of six years. These staff have no security at all and usually find that they must do more hours of work than they are paid for. They do this because they do not want their students to suffer. Recently wage theft has been uncovered in the sector, with universities forced to pay back tens of millions in wages (Senate Select Committee 2021). However, employee expenses are not the most significant growth in expenses in universities over the past ten years. Instead, the most growth activities in universities are senior executives salaries, consulting fees, marketing, commission agents, service provider fees and outsourcing of university activities to commercial providers and other Other Expenditures of $7billion (CMM October 4).
The rhetoric of accounting numbers is not real
The seventh gap between rhetoric and reality is that the vice-chancellors and university councils provide reliable and audited accounting numbers. The reality is that their public disclosures tend to confuse and conflate different types of accounting numbers. Moreover, they ring-fence other revenues from operating activity, that is, investment income and commercial income. Interestingly, most of the funds for these original investments and commercial businesses would have come from excess government grants and student fees via the loan scheme to educate students.
The gap between rhetoric and reality strongly suggests that it is challenging to be part of a public sector university, either staff or student. Vice-chancellors use their interpretations of the financial results to paint a picture of ill financial health and a crisis. A realistic assessment of the financial health of public sector universities that examines underlying trends, threats and opportunities over an extended period shows that most public sector universities are doing very well. Nevertheless, despite their essential role in society ‒ and their growing financial significance ‒ public universities public financial accountability and transparency are vague.
Distinguished Professor James Guthrie AM, Macquarie U Business School
Guthrie, J., Linnenluecke, M., Martin-Sardesai, A., Shen, Y. and Smith, T. 2021 ‘On the resilience of Australian public universities: Why our institutions may fail unless vice-chancellors rethink broken business models’, Accounting and Finance Journal.
Guthrie, J. (1998), “Application of Accrual Accounting in the Australian Public Sector — Rhetoric or Reality?”, Financial Accountability and Management, Vol. 14 No. 1, pp. 1-19.
SENATE SELECT COMMITTEE ON JOB SECURITY (2021) Second interim report: insecurity in publicly-funded jobs, October Canberra: Commonwealth of Australia.
[i] The finance and accounting data we extracted from the DESE (2021) University Finances 2020 summary information, 28 October 2021 and their database. These are the financial results for the sector for 2020. It is noted that individual universities have different results, and mainly report on aggregate data. We do not reference the data in the paper as it comes from this DESE (2021).
The 2020 Financial Report for Higher Education Providers is available on the Department of Education, Skills and Employment website