Some New Zealand universities are at risk of running out of money to pay their bills this year, according to a warning in a Tertiary Education Commission briefing.
The document - released to RNZ under the Official Information Act - says tertiary institutions are relying on hostels and consultancy work to make ends meet, because teaching students is barely profitable for universities and loss making for polytechnics.
It says the tertiary sector is facing its biggest financial challenge in a generation and shows that sharp changes in school-leavers’ choices punished some universities and rewarded others.
The commission gave the “Financial overview of the tertiary sector” document to incoming Tertiary Education Minister Penny Simmonds in late November, following its main briefing earlier that month to the incoming minister.
It said the commission regarded Victoria and Massey universities as high risk, and Lincoln and Waikato universities as medium risk.
It also warned some universities could run out of money.
“Some universities may experience a liquidity crisis. Several universities are reporting large underlying deficits in 2023 and are forecasting liquidity to be tight over the coming years whilst still needing to deliver significant improvement to their underlying profitability.
“If performance is worse than expected and they are unable to realise benefits from current initiatives, or there is an urgent demand on cash, there is a risk that some universities may run out of cash and/or breach borrowing limits,” the report said.
“Even if a liquidity crisis is avoided, some universities are forecasting high debt levels for an extended period with limited means to repay debt balances, leaving them vulnerable to a negative financial shock and restricting future investment options. Careful monitoring of cash and debt levels will be required by university management.”
Incoming Tertiary Education Minister Penny Simmonds in late November. Photo / Mark Mitchell
Universities defend their money management
But the universities told RNZ they were not in any danger of running out of money, and several contested the risk ratings.
Massey said its 2023 deficit might have raised a red flag, but it could not imagine a situation where it would have to borrow money this year. Victoria said it did not agree that it was a financial risk and it was not at risk of running out of money.
Lincoln said it was forecasting a small surplus for 2024 and was debt-free with a healthy cash position. Waikato said its medium-risk rating fairly reflected the current environment, but it would not run out of money or exceed borrowing limits this year.
The commission’s briefing provided insights into tertiary institutions’ sources of income and their profitability.
It said universities made most of their profit from activities like student hostels and consultancy, rather than from their main activities of teaching and research.
“Over the past five years, the university subsector has reported an average surplus of $146 million per annum. Around 55 per cent of that surplus has come from non-core activity (eg. student accommodation, hospitality, consultancy), 35 per cent from nonoperational items (eg. interest received, net trust income), and only 10 per cent from core activity such as teaching and research, despite it representing 86 per cent of all income.”
The report said based on forecasts made in September last year, universities were expected to post a collective deficit of $8m for 2023. It said if unusual items and income from trusts were ignored, the “underlying” deficit was $85m, a figure equivalent to 1.85 per cent of the sector’s revenue.
The report said the university sector was expecting another deficit in 2024 - but a return to surplus in 2025.
It said in the three-year period from 2023 to 2025 the sector would enrol about 22,500 fewer domestic students than originally expected and that would decrease income by about $450m over that period.
The report said Victoria and Massey lost significant market share of school-leaver enrolments in recent years, while Canterbury had made significant gains.
Vice-chancellors to meet this week
Tertiary Education Minister Penny Simmonds said universities were autonomous entities and she was monitoring their work on their financial sustainability.
Universities New Zealand chief executive Chris Whelan said vice-chancellors were scheduled to meet for the first time this year on Thursday and he expected the sector’s financial sustainability would be the focus of that meeting.
Whelan said the TEC briefing was broadly correct and the fundamental problem for universities was the erosion of government funding against rising inflation.
Massey University vice-chancellor Jan Thomas said its high-risk rating probably related to the university’s 2023 deficit, but its current situation was much improved.
“We forecast an end-of-year result that was quite high. That is in our unaudited results at the end-of-year wash-up actually a bit lower, but it is a deficit that would worry the Tertiary Education Commission - so I understand why they would have a red flag on us,” she said.
Professor Thomas said the commission’s warning of a liquidity crisis did not fit Massey because it had no debt.
“I cannot imagine a situation this year when we would have to go into our borrowings, particularly as we’ve got a short-term liquidity facility of around $20 million - again, we’re not planning on using that,” she said.
Lincoln University said its financial outlook was positive with growth in domestic student numbers and international numbers on target.
Waikato said its medium-risk rating reflected the slow return of foreign students, the absence of growth in domestic students numbers and inflation-driven cost increases.
“A high proportion of our costs being in people, systems and buildings that cannot easily be reduced to any large extent (they are relatively fixed). As the report points out on page 11, the university has taken a ‘rolling’ approach to addressing staffing levels over a number of years, which we believe has contributed to our financial deficit being lower than other universities.
“The university won’t run out of money or exceed borrowing limits this year, and hopes to be able to reach break-even in 2025,” it said.
Victoria University of Wellington said it did not agree it had financial risk and there was no indication the commission wanted special monitoring of its finances.
“It’s hard to know on what information the TEC briefing was based and, more significantly, when it was prepared during 2023. This is important because from June to October last year changes were made at the university to enable us to start 2024 on a positive, stable footing and ready to deliver a strong student experience across a range of high-quality study options,” it said.
Victoria said it appeared to have turned around the enrolment decline it had experienced over several years.
