Budget Update 2015/16
In this forum, the first on the budget that I have conducted this year, I want to talk about how we have travelled financially in 2015 and what the outlook is for 2016. I only intend to speak for about 30 minutes and then open the floor for questions and comments.
Most of you will recall that in 2013 we had a difficult financial period with significant funding cuts coming on top of a weak financial position and growing expenses. It was a difficult period and we handled it, as a community, well. Recovery, at least financially, came relatively quickly with a promising increase in revenue in 2014 and much reduced costs, particularly the reduction in professional staff costs, due largely to a staff freeze and voluntary early retirements.
In 2014 our enrolments grew in all the major categories, international students, postgraduate domestic students and domestic undergraduate students.
At the end of 2014 we recorded an overall surplus of $14.6 million, a result ahead of where we had hoped to be. We had not expected to be back in surplus until 2015.
Those promising outcomes in 2014 also allowed us the opportunity to lift the staff freeze in May 2014.
I therefore approached the 2015 budget with both a degree of optimism and a degree of confidence which was reflected in the framing of that budget and the long term outlook.
In terms of our 2015 performance, I should emphasise the importance of student related revenues as those revenues which we have the greatest capacity to vary. We can grow our revenues through growth in student numbers, growing our research income is much harder. At least $350 million of all our revenues comes from student related income.
2015 started with some good news:
- Our domestic undergraduate first preferences rose very strongly, with first preferences up by 13 per cent, the second highest in NSW/ACT and a vast improvement on prior years.
- This year our superannuation liabilities also recovered fully from their damage during the global financial crisis. We now have the superannuation provision back in surplus for the first time since 2008. This means we don’t have to contribute University operating funds to topping it up.
However, the main series of outcomes for 2015 have been financial disappointments:
- International enrolments at ANU which performed really strongly in 2014 did not follow on in 2015. Overall revenue increased because we continued to increase fees for international students but ultimately income came in $4 million less than budgeted. This was principally because we had a disappointing first semester intake. There are various theories as to why this happened and no one has a definitive answer but the bottom line is that we significantly underperformed, with a real drop in the number of commencing international students over the year before. However, second semester did come through more strongly, limiting the amount of the downside to only $4 million.
- The tightening circumstances of the Commonwealth Government hurt us to a degree that I should have expected. The consolidation of AusAID with DFAT and other changes to funding for Commonwealth agencies hit harder than expected, with us now projecting that revenue from these sources will be down.
- The ever reducing funding pool for the ARC has also impacted. Although our success rates remain high, the smaller pool of funds mean that we will receive about $10 million less from the ARC this year than we received in 2014.
- Linked with the deterioration in the funding available to Commonwealth departments, domestic postgraduate numbers also fell. We had budgeted for an increase in revenue from these lines in 2015, expecting an increase from $37 million in 2014 to $43 million in 2015. This did not happen and our final 2015 revenues from domestic postgraduates may not even reach the same level as in 2014. This is particularly hard on those colleges, CAP and CoL, who have larger cohorts of these students.
- Investment markets have been unstable this year, particularly the Australian stock market. Declining returns from Australian stocks have been offset by the depreciation of the Australian dollar which means our international equities have gone up strongly in value but we are still projecting an annual investment return of 6.25 per cent, below our long term average return of 8.8 per cent.
- We lifted the staff freeze in the first half of 2014 and although our professional staff costs were OK at the end of 2014, we were seeing a growth in professional staff numbers and the full financial impact of this significant growth in professional staff numbers did not emerge until 2015 when professional staff costs rose from $255 million in 2014 to $274 million. That is a rise of 7.3 per cent. Even allowing for salary increases from the Enterprise agreement that was a big increase, well in excess of what we had budgeted for.
In January 2014, we had 2229 professional staff FTE but by 30 September 2015 we had 2389, an increase of 160 positions. That growth nearly all occurred in the second half of 2014.
Where did this increase occur?
Much of it occurred in some of the support portfolios, student recruitment and alumni relations. However, these are all relatively small units and the increases were linked to our strategic intent to grow our performance in these areas. There was no real difference in growth rates between the Colleges and the main service divisions as groups.
The bad news of 2015 considerably outweighs the good news.
Overall, this means we are currently projecting a small loss for 2015 – <$1 million, but this is a significant deterioration from the $14.6 million surplus we recorded in 2014. It is also a very significant deterioration from the original 2015 budget where we budgeted for a surplus of $27 million, that’s basically a $27 million deterioration on budget for 2015.
Before I turn to what that means for 2016, let me just turn to another piece of work we undertook in 2015. Many of you may recall that in previous budget forums, one of the confusing issues is understanding how the University is performing financially – confused by our investment earnings and even by some of our commercial activities.
For the first time in 2015, we separated these different activities so that we can see clearly how these three different segments are performing financially. The three segments are operating, trading and investment. There are no surprises in the results but the scale is important.
Firstly, our trading activities include principally student accommodation but also car parking and various other ancillary commercial activities. These activities generate a small surplus – $12 million in 2015 – on revenues of $67 million.
Secondly, our investment activities, the return on the investment of our superannuation liabilities, endowments and other University funds, generate a significant surplus of around $30 million. However, remember that most of these returns have to go to meet the commitments to endowments and superannuation liabilities.
Thirdly, our core operating activities. These relate to our core academic and support activities, our education and research activities. These are in the red, $38 million in 2014, and a projected $42 million in 2015. The overall aim must be to get these core activities to balance and the process of budget reform has been aimed at progressive improvement in this underlying operating performance.
It is against this backdrop that we come to the setting of the budget for 2016.
The University Council and its Finance Committee are the ultimate responsibility for approving the University budget. They were obviously unhappy with our financial performance in 2015, not just with the performance itself but also with the degree of optimism which underpinned it. This requires us to adopt a much more conservative approach to the 2016 budget.
Indeed, the Council in October rejected our first version of the 2016 budget as making insufficient progress to address the underlying weakness of the operating budget and still being overly optimistic on the outlook for 2016.
What are the specific criticisms?
The first criticism is on professional staff expenses. The 7.3 per cent blow out in professional staff costs in 2015 erodes the value of all the hard work we had done in 2013 and 2014. This does not mean that we will be reimposing the staff freeze or that there will be major redundancies. However, it does mean that we need to more tightly control the escalation of professional staff costs and make sure that professional staff costs going forward do not grow to any significant extent.
The Council has specifically asked for an update report on administrative reform and efficiency gains for its December meeting and has expressed the opinion that the pace of administrative reform needs to be increased.
The second criticism is about the rate of restructuring of the operating budget. For many years ANU has been underinvesting in the campus, the campus infrastructure is depreciating at a rate of about $75 million per annum and our recent capital allocation decisions have taken us to the point where we are investing some $45 million per annum to offset this decline but we are still around $30 million a year short of addressing the issue. We cannot deliver on our academic potential with second rate infrastructure. Recent decisions to fund refurbishments of the Robertson, Coombs and Law buildings are obvious actions to reverse the sorry state of some ANU buildings but there are many more in a similar parlous state, let alone any ability to claim that we have a world class campus.
We have other infrastructure related projects that we are working on that are not yet approved or funded. We are working on a concept for much needed improvements to teaching spaces, library services and student services through the Union Court master plan and we are working on landscape and car parks using parking revenues.
The third criticism is on being overly optimistic on revenue projections. Overall, we are budgeting revenues in 2016 to increase from a projected $965 million in 2015 to $979 million in 2016, an overall increase of only 1.5 per cent. Most, if not all, of these revenue projections are student enrolment driven but the main risk to the budget lies in our research revenues. The 2015 drop in ARC income, coupled with the reductions in other government revenues for consulting and contract research, including a declining pipeline of funding as some 3 year deals wind down and are not replaced, mean that we are budgeting for other government funding to drop from $193 million in 2015 to only $174 million in 2016. 2015 included a large on off for the GMT which does not recur in 2016, so the gap is not as large as it seems but government revenues continue to be a concern.
Modest increases in student revenue do something to offset these falls. The outlook for domestic undergraduate enrolments for 2016 is very good. Our first preferences are up by 15 per cent, meaning that over the 2 year period 2015-16, our first preferences have grown by over 25 per cent. This is a spectacular result. Not all of these first preferences convert to enrolments as some students fail to achieve the ATAR they had planned for, but it will still deliver solid growth in undergraduate student commencements.
However, undergraduate places generate less revenue per student than any other category of student enrolments and most of the growth in demand is in programs that are in the lower funding clusters. So the overall benefit to budget is likely to be modest.
International enrolments deliver much greater revenue but at this stage we have no credible evidence on international enrolments for 2016. There are some very early numbers which look optimistic but we saw the same pattern in the lead up to 2015 and the early promise did not materialize.
Nevertheless, we are budgeting for international student revenues to rise by 11.5 per cent not because of optimism over enrolments but because 2016 completes a range of major increases to international tuition fees that we have been driving over the past 3 years. Our international tuition fees are now on a par with other GO8 universities.
The outlook for domestic fee paying, postgraduate student numbers is even more complex to project. We have seen this demand taper down from 2014 to 2015 and the forward outlook for 2016 is not optimistic. We are budgeting for a slight increase in revenues based on price rises but no real increase in student numbers and late breaking information makes me worry that there could be an actual downturn in 2016.
On the expenses side, there are some other things to worry about. There has been considerable angst over recent weeks about the library collection budget. These are the funds used by the University to purchase serials and monographs. The majority of these purchases are made overseas, particularly in USD, and the drop in the Australian dollar, adds another $600,000 in costs to keep up with 2015 purchases. We have allocated additional funds to meet this drop but general price rises in serials costs and the impact of the past 3 years of decline in the Australian dollar mean that our real purchasing power has declined significantly and the Library is having to make cancellations and tighten up on purchasing.
2016 is the last year of the Enterprise Agreement so there will be a further 3% salary payment in July 2016. This automatically means the salary expense lines will grow by a further 3 per cent. However, our total revenues for 2016 are only growing at 1.5 per cent. This means we are all going to be squeezed to balance our respective budgets.
One piece of good news for 2016 is that we are close to finalising a restructure of our debts. We have $290 million of debt including $200 million which is locked in at just over 7 per cent. We are currently refinancing this and an announcement in imminent.
All of these factors mean that the outlook for 2016 is much more conservative than was the case in 2015. The overall forecast is for a small surplus of $7 million but in order to meet that we will have to maintain tight control over our expenses.
A number of Colleges face significant financial challenges as a result of the reductions in revenue that I have talked about. Some Colleges with strong international student cohorts are in good shape.
Over the coming weeks, the Senior Management Group will be discussing how well existing controls over expenses are working and whether adjustments need to be made.
We will also commence a discussion about a more strategic approach to decisions on how we will meet the challenges of further budget impacts in future years. While my rhetoric over recent years has been very much focused on professional staff expenses, we need to widen that out to consider everything that we do.
There are some clear priorities for further administrative improvement. The 2 major areas are IT and student administration. We are currently 20 per cent more expensive in IT than the average of 20 Australian universities that we benchmark with and this group includes all the GO8. Similarly we are 10 percent more expensive in student administration.
The 2016 Budget will be resubmitted to the University Council on 4 December.
Executive Director Administration and Planning
10 November 2015