$600m University Budget Collapse

INSIGHTS & RESOURCES

University of Melbourne faces $600m budget collapse in 2022

The Australian
by Tim Dodd 
18 October 2022

Quick read:

The University of Melbourne is facing a significant budget deficit of nearly $600 million this year due to a drop in investment income and the rising costs of post-pandemic recovery. 

The university’s financial update indicates a projected deficit of $194 million for 2022, following a surplus of $584 million in 2021. The decline in budget is primarily attributed to a decrease in income from investments, which shifted from a $470 million gain in 2021 to an anticipated loss this year. 

The university cites last year’s cost cuts and a one-time government grant as factors that contributed to the favorable 2021 result. The forecasted poor outcome is expected to be common across the higher education sector. 

Factors such as increased expenses for face-to-face lectures, online classes for international students, and slower growth in student numbers contribute to the financial strain. 

The university aims to return to an operating surplus by 2025 but acknowledges uncertainties arising from geopolitical issues and rising inflation. The unpredictable job market and geopolitical climate make it challenging to predict international student income, which accounted for over a quarter of the university’s revenue in 2021.

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Full article:

The University of Melbourne is facing a massive budget deterioration of nearly $600m this year, driven by a collapse in investment income and the growing cost of post-pandemic recovery.

A financial update brief sent to staff this month forecasts a $194m deficit for 2022, which follows the huge $584m surplus the university reported in 2021.

The main factor in the budget collapse is a plunge in income from the university’s investments, which shifted from a $470m gain in 2021 to a large expected loss this year. In the year so far the universities investments have seen an unrealised loss of $351m (compared to unrealised gains of $252m in 2021.)

The university said that, if this year’s investment conditions had applied last year, the $584m 2021 surplus would have been a $19m deficit.

In the update the university says that its healthy 2021 result was assisted by $254m in cost cuts (to deal with the financial stress caused by the pandemic) and a one-off $111m grant from the federal government to support research during the pandemic.

The University of Melbourne is the first university to offer insight into its 2022 results but its forecast poor outcome is expected to be widespread across the sector

Keith Houghton, chief academic strategist at the Higher Education and Research Group, said a general deterioration of university financial results was expected in 2022 as tight cost control applied during the pandemic was eased. He said universities also faced new expenditure which was not there pre-pandemic.

“Universities, Melbourne included, have to bear the cost of providing face-to-face lectures, as well as maintaining the ability to offer online classes to international students who have not yet come back to Australia,” Professor Houghton said.

The University of Melbourne’s preferred financial measure is what it calls its operating result, an underlying measure which differs from the reported accounting result by leaving out some items including movement in the value of investments, endowment income, philanthropic income and infrastructure grants.

On an operating result basis – which omits the impact of investment losses – the university says it has moved from a $147m surplus in 2021 to a forecast $113m deficit in 2022. The university says it has a pathway to return to an operating surplus in 2025, but warns of uncertainties stemming from the uncertain geopolitical climate and rising inflation.

It says it is dealing with slower than expected growth in student numbers, student fees which will increase at a rate less than inflation, the cost of reopening the campus and running online classes as well as face-to-face delivery, increased investments in student services and assistance to disadvantaged students, and rising costs which are either non-discretionary (such as insurance) or already committed to (such as new buildings that are underway).

The university said the current strong job market – in which well paid jobs are abundant due to labour shortages – was leading to fewer than expected students.

It also warned that geopolitical uncertainty made it difficult to forecast international student income which, in 2021, amounted to $856m, over a quarter of total university revenue.

 

There is growing anticipation that the federal government’s response to the Universities Accord review’s final report will come soon. Given this and the fact that the budget is less than a month away, it is timely to review one of the final report’s key insights.

Recently released analysis finds that one large Group of Eight university outperformed other public universities in its research and education productivity outcomes during the pandemic.

The joint and common cost problem arises where there are two or more outputs that arise from costs that are shared in the production of these outputs. In many situations, the ability to assign costs to these two or more outputs is not complex. But there are instances where it is highly complex. In these situations, there is a need to use advanced analytics to provide a valid and reliable estimate of costs.

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