by JAMES GUTHRIE

In February, University of Melbourne Vice-Chancellor Duncan Maskell, told staff that $360m was saved in 2020, and he aimed to save $252m in 2021.

Last month during a panel discussion at The Australian Financial Review’s HE Summit, he stated Uni Melbourne finished 2020 with an $8m surplus. This was achieved, he said, due to extreme measures, including a reduction in spending of $360m, running down cash reserves by $120m, lifting the debt ceiling by $300m and deferring $300m in capital expenditure (these latter three appear to be financial decisions that would not impact operations expenditures).  Professor Maskell went on to say, “please don’t think that that was a surplus that we would have made without all of those cuts and all of that extreme behaviour to cut things back. Many of my staff are utterly exhausted.”

So, what is this surplus from an accountant’s perspective?

Uni Melbourne monitors its financial performance using an internal financial measure referred to as the underlying net operating result, which is disclosed as an $8 million surplus, mentioned above. The university’s 2020 Annual Report states that the operating result represents the accounting surplus less net discretionary financing income and expenditure, infrastructure grants and endowment philanthropic income.

Up to 2013, the concept operating result was revenue minus expenditure derived via the audited income statement, but in 2014, the annual report states that “the university is operating in a period of unprecedented funding uncertainty and volatility. Despite this, in 2014 it achieved an underlying operating surplus of $5.8m, similar to that delivered in the prior year. Major drivers of this outcome were excellent growth in student revenue of $91.5m combined with prudent constrained cost increases, offset by restructure costs related to the Business Improvement Programme.”

Therefore in 2014, Uni Melbourne started to talk about its financial position as an underlying net operating result via a non-audited statement. The university explained the accounting concept of the underlying net operating result as representing the university’s total net operating result after deducting revenues received directed to specific purposes that are not available to be utilised at the university’s discretion.

All Group of Eight universities have adopted the method in their annual reports since 2014.

I have several accounting issues with this statement and the choices made to generate these accounting numbers as it is usually significantly less than the total university’s net operating result,  $178m in 2020.

Using the regulated financial statements, we can see net results of $178m, an increase in total assets of nearly $638m and cash and net cash equivalent at the end of the financial year of $811m. Some significant movement in cash flows can be attributed to the proceeds from the sale of financial assets of $1.1bn and Uni Melbourne purchasing other financial assets of $1.3 billion. The university also experienced a decrease in investment income from $337m to $170m, a loss of $167 million.

The 2020 annual report states that the underlying net operating result “reflects the capacity of the university to live within its means, by removing from the accounting or net result, items that distort core operating performance such as discretionary investment income and income of a capital nature. This provides a safeguard against unexpected adverse events and ensures no cross-subsidisation of operations from investments. When global markets are volatile, relying on investments for operations is a high-risk strategy”.

This is where it gets interesting. The university’s total financial assets are about $2.7bn ($1.2bn in 2010), of which a small part would be discretionary funds from endowments. 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 quarantined from operating activity. So, what happens to this income? I can only assume that it goes back into further financial investments.

Let us take a moment to step back in history. In 1853, the newly formed Parliament of Victoria established the University of Melbourne with the enduring purpose to benefit society through the transformative impact of education and research.

However, the numbers above suggest that the university is more like a finance business, actively engaging in the market via a range of derivatives, currency swaps and cash holdings, and marketable shares.

The annual report reveals that property plant and equipment totalled $5.7bn ($2.8bn in 2010), most of which would have been gifted or in the form of capital grants from the state. There is an accrual depreciation of $133m, which reduces the net results. The university has service concession arrangements with private sector operators for the provision of student accommodation. As a result of introducing a new accounting standard, the annual report recognises $196m of service concession assets and a $152m related liability on January 1 2019. Finally, total borrowings are about $684m, a decrease from 2019 borrowings. I taught public sector financial management at the University of Melbourne and the Australia and New Zealand School of Government from  2004 to 2014 and witnessed the campus creeping towards the CBD with significant expenditure on new buildings. Not just a finance business. Also, it looks like a property business.

At the same time, as Professor Maskell’s staff became “utterly exhausted” over 2020 and beyond, the university has seen voluntary redundancies, hiring freezes, non-renewal of casual contracts and cutting back of casual positions to unsustainable levels.

How is this represented in the accounting numbers? The Melbourne University Charities Commission reports for 2019 and 2020 contain the following data.

* for 2020 employees and volunteers: Full-time employees, 6647; Part-time employees, 2618; Casual employees, 5563; Headcount 14 828; Full-time equivalent staff (FTE), 8 193.

* for 2019 employees and volunteers: Full-time employees, 6777; Part-time employees, 2587; Casual employees, 6768; Headcount 16 132; Full-time equivalent staff (FTE), 8 303.

This shows a drop in employment of about 1300 employees during 2020. (see CMM June 30 2021).

However, the tabled Annual Report for 2020 shows an FTE of 9198 and for 2019 9514 FTE. How can this be?

Meanwhile, Professor Maskell is the highest-paid VC in Australia for 2020 at about $1.5m. He also would be entitled to at least $300,000 as an independent non-executive director on the board of biotech giant CSL Limited. There are 12 senior executives at the university paid over $500 000. To put this in perspective, the Victorian premier earns less than $500 000.

This does not sit well with the Federal Education Minister Alan Tudge. He has backed the recent chancellors’ voluntary code that would benchmark the salaries of university vice-chancellors against top public servants to make their pay packets more transparent. Also, the minister told the AFR Summit that universities’ diminishing revenue streams in 2020 were more a consequence of falling investment returns than the decline in international student enrolment due to the COVID-19 pandemic.

The University of Melbourne’s operating result on paper does not reflect its fiscal reality. That the bulk of its surplus is unavailable for general operational expenses is a matter of choice, not accounting logic or calculations. Nor is it alone. Australian public sector universities have adopted imprecise language to describe their 2020 financial results in press releases and internal documents. While they use accrual accounting in financial statements, including many costs like depreciation that have little relevance to public organisations where governments have gifted the land and buildings, we should be looking at the cash movements in their annual reports.

For the 36 Australian institutions that have published their 2020 financial accounts, all but one had achieved surpluses on cash transactions, an increase averaging around 3.5 per cent. But this crucial figure is not always easy to find.

Distinguished Professor James Guthrie AM, Macquarie U Business School

References used

Melbourne university annual report 2020, 2019

Melbourne university charities commission report 2020, 2019

Melbourne university media releases

Higher Education & Skills Group (HESG) Victorian Department of Education and Training guidelines on annual report workforce data.

James Guthrie (2021), What the Auditor General reveals about Vic uni finances,  Campus Morning Mail June 28