UCU UoN Response to Management’s Presentation on our AFS

UCU UoN response to the presentation by management on the Alternative Financial Strategy

We appreciate UoN management’s written response to UCU’s Alternative Financial Strategy (AFS) in their 36-slide presentation. Unfortunately, however, the UCU branch committee believes that it frequently misrepresents our position and contains several inaccuracies.

We are particularly disappointed that management has failed to understand that the AFS is not merely about financial figures but rather reflects a fundamentally different approach to how UoN finances could be organised. This alternative needs to be debated openly rather than rejected outright. UCU seeks to open up this discussion, whilst management seems to want to close it down.

Here we set out our responses to the key points raised by UoN management. We do not intend to engage with every point raised in the 36-slide presentation but to focus on a few key issues.


A) Overambitious Investment Plans That Will Have Serious Consequences for Staff and Students

While it is correct that the University has not ‘published’ a £430m investment programme [slide 33], the Medium Term Financial Plan (MTFP) that UCU has viewed outlines an extremely ambitious £430m investment plan over the next 4-5 years. We understand that for each investment project business cases will need to be developed, reviewed and approved by Council’s finance committee and ultimately by Council itself. However, the MTFP sets the direction of travel, and it is ultimately the instrument that puts UoN’s Strategy into practice. These investment plans were developed before the pandemic, put on hold during the year of Covid’s worst impact (FY20-21) and are set to be resumed in FY21-22.

An updated MTFP was approved in March 2021, and UCU has asked for this to be shared with the unions and the university community. We have yet to receive the updated version of MTFP, but we do not anticipate that the plans have changed substantially, as this would mean a change in UoN’s Strategy.

In its response, UoN management writes [slide 24 – emphasis added]: ‘Using debt to fund investment (as UCU proposes in the AFS) would mean that the UoN would incur approx. £100m of extra debt a year – if this had been the case for the last 5 years, UoN would have been entering the COVID crisis with £600m of debt and no cash.’ This seems to confirm our understanding that UoN management’s plans do indeed still need £100m a year to fund investment.

Raising £100m a year to fund investment is ambitious in and of itself.

Yet, UoN management is committed to funding investment solely using surpluses from day-to-day activities, i.e. teaching and research. This makes it not only ambitious but imprudent.

The University’s own figures project increases in income of 35%, while simultaneously maintaining budget reductions of 11%. Lean financial management—supported via the Getting in Shape programme—will be used to maximise efficiency and support business units (schools and departments) in achieving the saving targets.

The main driver for efficiency and saving targets are the investment plans, not any loss of income due to the impact of Covid.

Moreover, in addition to this austerity programme, there will be a drive to increase income. ‘The amount of additional income we gain by increasing the scale of our activity, which will rise only slightly, [emphasis added, slide 29] will be achieved by increasing the proportion of international students and by increasing research margin.’

According to the previous iteration of the MTFP, the University did aim to recruit a considerably higher number of students. We are therefore pleased to hear that the University has changed course with respect to increasing student enrolment and will instead focus on changing the composition of recruited students with the aim of increasing the number of overseas students (whether this will be possible in a world still marked by Covid travel restrictions is a different question and what the consequences of this changing composition for staff will be is also an open question).

However, UCU is extremely concerned that pursuing these goals will not result in a ‘slightly higher scale of activity’ as the University suggests but will place an already exhausted staff under even more — and from UCU’s perspective unnecessary — strain. The twin pressures to drive up ‘output’ while cutting costs will be unsustainable.

UoN management state that: ‘We want to invest in our future, within our means, in a fair and sustainable manner’ [slide 34]. We do not believe that a £430m investment plan is ‘within UoN’s means’ or that its current financial strategy is either fair or sustainable. If UoN pursues these overly ambitious and unrealistic plans, an unacceptable level of strain will put on staff, who are already exhausted post-pandemic.

All costs of the investment plans will fall on current employees, which UCU believes is detrimental to the overall health and indeed the future sustainability of the University as a charitable institution of higher education.

Is this level of capital spending really necessary? Is it really necessary to burden our short term future (4-5 years) in this manner? What is driving these investment plans? What is the plan for the long-term future (10-20 years)?

We demand a genuine debate about the University’s investment priorities and an opportunity to postpone projects as necessary. We believe that an 11% budget cut across the institution would not be necessary if the University were to take a different approach to its finances.


B) Consider careful long-term borrowing for essential investment plans

UCU’s position is clear. We believe that UoN management must consider long-term borrowing to finance high-cost capital investment projects that generate long-term benefits. These cannot be financed solely through increasing surpluses from day-to-day activities in such a short period. This is particularly true at a time when the Covid pandemic has inflicted a devastating short-term shock to the higher education sector, a shock that requires a measured, long-term response.

No other Russell Group university finances its investment projects solely through surpluses. Why is the University of Nottingham an outlier in this regard?

UCU accepts that there are interest cost implications of such an approach, but we believe that funding long-term projects through long-term financing is both sustainable and much fairer. Moreover, this is particularly true when interest rates are extremely low and can be set now for many years to come.

The University claims that using borrowing to finance these projects is irresponsible and will place ‘additional burdens on future generations of students and staff’ [slide 2]. Yet, financing these projects solely through operational surpluses over such a short time-frame will place excessive strain on current staff and drastically exacerbate work-related stress, already untenable workloads, and increasing burn out. UCU believes that this is irresponsible since it will bring unnecessary hardship to staff.

Management has also claimed that the approach advocated by UoN UCU runs counter to national UCU policy, which has opposed the financialisation of the sector. Each of these points needs addressing:

1) To be clear –we are not arguing for reckless borrowing, but rather favour finance models that spread the cost of a project over several decades so that future beneficiaries also contribute to financing. Raising hundreds of millions of free cash for investment over five years puts a different order of strain on present budgets and staff (austerity) compared to paying off the same amount plus low fixed rate interest over 40-50 years. This is a very simple accounting principle that is widely applied across the public sector. Why should the current generation bear all of the costs of an infrastructure project that will benefit future generations? Current staff are being required to increase research margins by writing and winning larger research grants and to help recruit, teach and support higher numbers of international students; their workloads have skyrocketed and their actual research time has been cut; all the while, however, they are being subjected to austerity, i.e. a permanent reduction of 11% in the cost base—and all of this to fund investment plans that they know very little about and have no say in deciding.

2) UoN UCU rejects that its AFS stands at odds with national union policy on sector debt. Rather we argue that management’s response intentionally conflates two separate issues. UoN UCU completely supports the national union’s policy of challenging those universities which have chosen to max out the credit card to finance the sadly familiar array of so-called ‘prestige’ vanity projects. Nottingham has a few of its own; see, for example the Portland steps. We share the concern with sector debt caused by a number of universities. However, this contrasts sharply with the call in the AFS for Nottingham to ‘Adopt a financial strategy based on careful, long-term borrowing for key 4 infrastructure projects in line with practice in other Russell Group universities’. To suggest that UCU is advocating the University takes on unsustainable levels of debt is an unhelpful representation of what the union is calling for.

We demand a commitment to fund essential, high cost, long-term capital projects by using appropriate forms of long-term financing


C) The UoN financial model is imprudent and risky

The University chooses to operate with low levels of cash, whilst depending on Revolving Credit Facilities (RCFs) to manage liquidity and cash flow. This approach to finance management is unique among Russell Group universities. It reflects principles of ‘lean management’ more common in the private sector. It is controversial, particularly when applied in the public sector. In its response, UoN management stated that their approach is the norm outside the higher education sector. Why have no other universities adopted Nottingham’s financial model? Which sectors adopt this model? Are they commercial or charitable?

UCU is convinced that UoN’s strategy involves unnecessary risk, because the University has little headroom when faced with an exogenous shock, such as the pandemic. This is why the University was forced to impose an immediate embargo on so-called ‘non-essential expenditure’ when the pandemic struck and then sought cuts of £85m for the 2020/21 budget (this was the target for the 15% plans in May/June 2020). This also explains why management put in place a large Voluntary Redundancy scheme, 400+ people applied and 361 staff members left the University in summer 2020. We believe such actions reflected the University’s concern in the Spring/Summer of 2020 that it would literally run out of money.

In an email to all staff on 6 April 2020, the University said: ‘If we did nothing and carried on spending as normal, our debt could increase to around £175 million by August 2020, meaning, with our current facilities, we would no longer be able to operate and pay the bills that we need to pay.’


These were not actions experienced to the same degree in our peer universities. Take the University of Bristol, for example, which is a similar sized university and is often used as a comparison by UoN management. Bristol did not have to introduce a voluntary redundancy scheme; in fact, such measures were specifically ruled out as it would have cost money when short term savings were needed.

In its response to UCU, the University maintains that ‘At no point in the last 12 months have we come close to breaching the Office for Students requirement to maintain £30m liquidity’ [slide 21]. This is a reference to the regulator’s requirement that institutions should have the liquid resources, such as cash, overdraft or other current credit facilities, to be able to cover at least 30 days of average expenditure at all times.

UCU does not agree with UoN management’s understanding of the OfS definition of liquidity, and we believe the University has underestimated the need for adequate liquid assets by £20 million.

The OfS Guidance for providers about reportable events during the Coronavirus (COVID-19) Pandemic [covid-19-reportable-events-guidance.pdf (officeforstudents.org.uk] states that:

A provider is required to report to the OfS if it considers it to be reasonably likely that its liquidity will drop below 30 days* at any point during a rolling three month period from the date of the report to the OfS.’
Footnote 3 of the Guidance defines liquidity as follows:
* Liquidity is defined as the number of days of average cash expenditure covered by liquidity values, i.e. the ratio of cash and cash equivalents over expenditure excluding depreciation multiplied by a factor of 365 (Liquidity days = (cash and cash equivalents)/(expenditure-depreciation)*365).’ (our emphasis)

The OfS requirement is for 30 days’ liquidity, not £30m.

Nottingham is a large university. Its annual expenditure (excluding depreciation) is over £600m. This means that a month’s average expenditure is over £50m.

When UCU asked on what basis the £30m figure was calculated, we were told that this equates roughly to a month’s worth of payroll expenditure, the only expenditure that cannot be paused or suspended under any circumstances.

However, 30 days of average expenditure includes all expenditure, bar depreciation. UoN management have left out all non-pay expenditure, which was over £250 million in 2019/20.

It is also clear that Nottingham relies on a generous interpretation of liquidity when it includes its large RCF. Other universities, such as UCL, calculate their liquidity “days” after excluding overdrafts, as does the Higher Education Statistics Agency in its annual financial publication.

More importantly, the Charity Commission recommends a minimum of 90 days so as to have a buffer against income shocks.

In UoN’s case, this would require liquid resources to be over £150m.

We note that on 31 July 2020, the University of Bristol had over £260m in cash and unrestricted current investments. This is nearly twice what UoN had available at the same time (£40m cash, plus £95m credit). Bristol went into the start of 2020/21 academic well-prepared financially; not only did it not have to run a redundancy scheme but it has not had to have any plans for permanent budget cuts, such as the 11% cuts staff are being subjected to at the University of Nottingham.

Another example is the University of Leeds, which is slightly bigger than Nottingham. At 31 July 2020, it had over £300m in cash and £100m available as an RCF. Again, cash reserves are clearly much higher than in the case of UoN, indicating the latter’s unusual, atypical model of managing its finances.

UoN management points out that its credit rating was evaluated as A+ by S&P, which they claim reflects the soundness of their financial approach. However, this rating, as S&P itself clearly states, was the result of action planned by the University in the wake of the pandemic, namely, an embargo on all expenditure and the introduction of the (at the time) 15% saving plans worth £85m, which included the VR scheme, i.e. job losses and pay freezes.

‘S&P Global Ratings today [19 June 2020] affirmed its ‘A+’ long-term issuer credit rating on Nottingham. The outlook is stable. The stable outlook reflects our expectation that Nottingham will achieve the cost savings it has identified in light of reduced income. …(our emphasis)

‘ This [financial impact in 2020/21] roughly equates to a £140 million loss of income. … we believe management will be able to reduce both opex [operating expenditure] and capital expenditure (capex) by around £140 million, which mitigates this loss. …Of the £140 million cost savings Nottingham has identified, £85 million relate to opex.’

Nottingham’s planned cost savings should protect its financial resources.’

‘This liquidity buffer should help Nottingham navigate this period of uncertainty
without the need to increase debt further.’

The fact that in November 2020 the University took out an additional £60m credit arrangement clearly vindicates our analysis that the University was operating with too little cash.

Considering that the new additional RCF with NatWest is a short-term facility, i.e. it expires after 5 years, we expect the liquidity issue will again present itself in the not too distant future.

We believe the University needs to build up its cash reserves to avoid liquidity problems in the future.


D) University finance and institutional governance

UCU disputes management’s claim that the University’s finances and decision-making processes are open to discussion, debate and democratic scrutiny.

In its response to the AFS, UoN management argues that the University’s governance structures are open and transparent and that there is a ‘high level of scrutiny’ of investment decisions [slide 36]. While perhaps correct on a formal level, we believe such an analysis belies a level of complacency about the extent to which staff feel engaged in decision-making at the University. We contend that the vast majority of staff have almost no knowledge of the large number of items that currently form the University’s investment wish list. The University community as a whole should be informed and meaningfully consulted with.

It is the view of UCU, given the impact of the pandemic, and the consequences for staff, that there needs to be a full review of the University’s investment programme with staff given meaningful opportunity to contribute to decision making. The union believes that Senate is the appropriate place for this debate to be held, and this should presage a more thorough review of governance in the University. We believe that Senate needs to become an entirely elected body.


Conclusion
There is not ‘one best way’ to manage University finances and UoN UCU believes it has presented a coherent and credible alternative to the approach adopted at UoN.

That is why UCU reiterates the five key demands of its Alternative Financial Strategy:
> Abandon the model of ‘lean financial management’ and its primary focus on ‘profitability’ and maximising annual surpluses.
> Adopt a financial strategy based on careful, long-term borrowing for key investment
projects in line with practice in other Russell Group universities that have fared much better during Covid and are not enduring future cuts of 11% across the board.
> Review the University’s investment programme in light of the pandemic, with priority given to investment in staff and students. Some projects may have to be delayed or even cancelled due to the pandemic.
> Open up the discussion of which investment projects should be retained in a broad consultation with all staff.
> Democratise investment decisions by establishing Senate as a key decision-making body

Challenging Lean Financial Management: An Alternative Financial Strategy for UoN.

For years, the University of Nottingham (UoN) has prided itself for its low debt levels and low cash reserves as a sign of highly efficient financial management. Yet, when the pandemic hit in March 2020 this lean financial management strategy unravelled. In order not to break the conditions of its Revolving Credit Facility (RCF), the University had to adopt drastic measures. It cut expenses by 15 per cent across the board followed by a Voluntary Redundancy scheme of unprecedented proportions. More than 400 members of staff left the institution. This has meant that workloads for remaining staff have skyrocketed and morale is extremely low.

There has to be a better way and there is.

In this post, we outline why UCU believes that UoN’s approach to its finances is risky, imprudent and unfit for a public, charitable non-profit higher education and research institution. We also introduce UCU’s UoN-Alternative-Financial-Strategy summary Mar2021.pdf .

Financial management at UoN is a form of ‘lean management’ in two important respects. First, it seeks to reduce costs by minimising interest payments on debt. Instead of drawing on long-term borrowing, it uses surpluses generated from day-to-day activities (teaching, research) to finance capital investment. Second, it seeks to hold low levels of (unproductive) cash, relying on a ‘just in time’ approach to cash flow management. In short, the emphasis is on holding minimum cash and minimum debt.

There are two key consequences of this approach. First, financing major long-term investments, without using long term borrowing, places enormous pressure on the organisation to generate immediate surpluses. This has to be achieved by maximising income generation and minimising costs. In short, labour ‘productivity’ must be increased as lean financial management drives the implementation of lean principles across the whole of the organisation.

Second, low levels of cash reserves make an organisation vulnerable to unanticipated system shocks as there is no buffer or contingency. Rather than hold large cash reserves UoN relies on RCFs to provide for its daily operational liquidity, a kind of ‘overdraft’ facility, whereby bank balances can go negative with the corresponding interest payment. However, RCFs come with stringent conditions, so-called covenants, which the University must meet. If the covenant is violated, banks can request immediate repayment of the total borrowing. If the total borrowing cannot be repaid, the institution can potentially be declared bankrupt. In short, RCFs are highly inflexible when it comes to moments of crisis (see AFS-Technical-Document_Mar2021.pdf ). 

UoN’s risky financial strategy was brutally exposed during the pandemic. In June/July 2020, UoN projected an overall reduction of £150m in income for the next academic year. Budget cuts of 15 per cent were then immediately imposed across all Faculties to achieve savings of £80m overall. The other £70m were made up of VR (the loss of more than 400 jobs); a freeze in pay increments, cost of living increases and promotions; a temporary suspension of most capital investment and some additional borrowing.

Those who thought that UoN might learn from its mistakes were sadly mistaken. Instead of changing financial strategy, the University intends to maintain and even extend its lean financial management. Indeed, it plans to carry out its ambitious investment project of about £430m, and will do so through increasing its annual turnover by nearly £200m on pre-Covid levels – namely to £880m. The only way the University can make this happen is by making the 15 per cent budget cuts permanent. This will mean further increases in workloads, which will have a profoundly detrimental impact on staff health and on student experience.

UCU Nottingham believes that there are financial alternatives, and these need to be guided by a commitment to prioritising people and not some form of ‘profitability’. We demand that UoN abandon its ‘lean financial management’ and replace it with a strategy based on careful, long-term borrowing for key investment projects. We further demand that decisions around investments be made through broad consultation amongst staff and finalised in a democratic decision-making process that involves the university community (universitas) as a whole.

And, finally, we demand that the University agrees a budget for 2021-22 that reflects the principles and approach set out in UCU’s Alternative Financial Strategy.