Financial planning | University of Oxford

Financial Planning

Information about the University's financial response to COVID-19.

Update 20 July

On 13 July Council approved a budget for the 2020/21 academic year – one which reflects the University being open this autumn as close to normal as possible, but in a changed world.

Overall, we estimate that the COVID pandemic will cost the university £90m in 2020/21. Other key features include:

Income

1. An estimated aggregate loss of income due to Coronavirus of £79m, principally in the form of international and non-matriculated student income, research income and exhibition, conference and trading income
2. Materially unchanged annual transfers from the Press and the Endowment Fund of £40m and £88m respectively

Costs

3. Savings and deferral of planned expenditure totalling £61m, including recruitment, minor capital and repairs & maintenance, and discretionary pay

Additional funding & investment

4. Additional funding for investment of £11m to support a Michaelmas re-opening, including funding for research extensions and COVID testing for staff and students
5. £11m additional funding to cover non-COVID related changes in departmental budgets

Drawdown on reserves

6. A drawdown on the University’s unrestricted reserves of up to £60m to cover loss of income – of which £12.5m relates to forecast loss of income incurred in this 2019/20 financial year.

Oxford is in the deeply fortunate position of having reserves to draw down – and thereby to avoid the more radical steps other institutions have taken. The University is committed to protecting existing jobs, to implementing the Oxford Living Wage, and to ensuring that all staff on furlough receive 100% of their salary. Specifically, this budget provides for:

  1. funding of extensions for Postgraduate Research (PGR) students to ensure that they have the time to complete their degrees, as well as an enhanced ‘returning carers’ fund to ease the return to work;
  2. additional IT investment to ensure that the University can operate more effectively under current government restrictions;
  3. investment in a modern integrated library system; and
  4. COVID-19 testing facilities for students and staff (new temporary buildings to accommodate this will be delivered to the Radcliffe Observatory Quarter and Old Road Campus on 3 August).

In order to afford these protective measures and investments and to contain the level of cash deficit, this budget has required costs and investments to be cut and deferred. Recognising the continuing uncertainty surrounding student numbers, additional costs of a Michaelmas re-opening and indeed further resurgences of the virus, the budget assumptions set out above will be subject to a comprehensive review as part of the Q1 forecast in November.

There is every hope that the forecast loss of student numbers and income is conservative and that the level of drawdown from reserves will be less than the £60m limit approved. However, even in the most optimistic scenario the impact of COVID-19 on research and tuition fee income is expected to extend beyond 2020/21 and therefore further income and cost mitigations are likely to be needed in the future. Throughout this budgeting process and going forward, Council has sought to protect the University’s mission and care for students and staff while also being mindful of the impact on future generations.

 

A message from David Prout, Pro-Vice-Chancellor for Planning and Resources

Since Easter, a sub-group of PRAC has been working with academic divisions and colleagues across the University to try and understand what the COVID crisis means for the University financially. The fact is, we don't know yet – just as we don't know what will happen with the virus itself.

When faced with this kind of uncertainty there are only two things to do financially. The first is to plan for the short, medium and long term. And the second is to construct a series of scenarios based on what we know and what we can reasonably assume.

With regard to the first, our immediate task is to replan our 2020/21 budgets. We have decided to focus on that at the moment, before thinking about the longer term over the coming months.

With regard to the second, we have decided to think about three alternative scenarios. Scenario 1 – which we think is the most likely – is that by the start of Michaelmas term, we will be open for business as close to usual as possible, but in a changed world.

It is the changed world, and the assumptions we make about it, that will affect us financially. The following figures relate to a paper presented to PRAC on 28 April. We are updating them constantly. Some are getting better. Some worse. It is also important to note that what I say below relates to University budgets. The colleges are of course also affected, in particular by loss of fee income and loss of accommodation and conference income.

  1. Our first assumption under Scenario 1 relates to overseas student numbers. Based on international student surveys and surveys of our own postgraduate offer holders, we anticipate that we could under-recruit next year by as many as 1,000 postgraduate taught, 300 postgraduate research and 300 undergraduate students. These figures are not certain, but they are reasonable, and the lost fee income would be in the order of £40m in 2020/21. Reduced non-matriculated income would add a further £10m loss. Tackling this shortfall is an urgently important task.

  2. Our second assumption relates to loss of research overhead income and the potential cost of research extensions necessitated by the lockdown. Based on what we already know about charitable and non-charitable funders, we anticipate the total of the lost income and increased costs to be in the order of £20m in 2020/21.

  3. Our third assumption relates to exhibition, trading and conference income. With social distancing in the museums and galleries, fewer tourists, and the general downturn in the economy, we anticipate a combined loss of income in these areas in the order of £5m in 2020/21.

  4. Finally, we have donation and investment income, including dividends from the Oxford University Press and returns from the Endowment Fund. Under scenario 1 in 2020/21 we anticipate a £15m loss in this income. Given the state of the stock markets and impact on OUP sales that may seem like a low number, but Scenario 1 anticipates a return to something like normality by the autumn. Under those circumstances we expect the Endowment to recover over time, and OUP to get back to something like its normal operation. Beyond 2020/21, even under Scenario 1, we would expect a very substantial cut in the OUP's triennial dividend, and it is likely that there will be an ongoing hit on income from the endowment. That will be built into our longer-term planning.

Taken together, this would amount to a £90m loss in 2020/21 (against a c.£1.7 billion turnover). Unfortunately, financial planners are, generally speaking, optimistic. So, in accordance with best practice we are also thinking about a £40m downside risk. That will accommodate some of the increased costs we are anticipating (for example, education and assessment IT, building adaptations and a possible virus testing programme), and gives a range of loss from £90m–£130m.

This is illustrated at a glance, and with a little more detail in the waterfall diagram below:

2020-21 Budget - Size of the gap. A chart showing current estimates predicting a reduction of £90-£130 million in operating cash surplus in 20/21 before mitigationsThis graph indicates the anticipated size of the budget gap.

To deal with this financial loss, we are working across the University on 'mitigations' (in other words, ways to increase income or reduce costs). We are taking a cautious and measured approach to this at this stage. As I say above, we don't know what is going to happen with the virus or the world around us. We are very alive to the importance of protecting our core mission of teaching and research, as well as the long term financial and academic well-being of the University.

At this stage therefore, we are not thinking in terms of radical cost reductions. We want to do what makes sense, for example by deferring capital spend and recruitments, or making use of the furlough scheme. But so long as Scenario 1 holds true, our working assumption is that we will not do anything to threaten the University's academic pre-eminence and will plug any agreed funding shortfall from reserves. That doesn't mean 'do nothing'. It means 'do the right thing'.

Our 'mitigations', therefore, can be grouped into four areas.

  1. The first is that we must do what we can at departmental and college levels to ensure that our existing undergraduate and postgraduate offer holders take up their places. For the anticipated loss in overseas students, we must do what we can to attract new recruits. This will protect our income, and is absolutely the most painless way to reduce the impact of the current crisis on the University. We know many colleagues think our projections in terms of loss of students are pessimistic, but they are more optimistic than Russell Group colleagues.

  2. Second, in order to cope with the immediate loss of income, we must defer or cancel non-critical expenditure and recruitments, and reduce discretionary costs. At present, we are planning to reprofile the Minor Capital Plan to defer about £25m of expenditure over the next two years. Divisional recruitment panels are looking at all new recruitments to see if they are absolutely necessary at this particular moment. And departments are looking at 'non-pay' costs (things like travel, hospitality or new laptops) to see what can be avoided in the next financial year. We are also looking at the Strategic Capital Plan (our major capital projects) with a view to finding new sources of funding and avoiding long term commitments until we understand the full impact of the virus.

  3. Third, there is the question of pay. At present, we are not proposing any reductions in pay or voluntary or compulsory redundancies. The current level of uncertainty about the future would not justify that. However, built into our pre-COVID 2020/21 budgets, there were assumptions about pay rises. Some of this is the subject of national negotiation, other areas are for local discretion. To look at these areas is prudent and reasonable, given the scale of the hit on the national economy.

  4. Finally, there are the reserves. Oxford is blessed by its diverse sources of income, and also by its large Endowment Fund. Much of the endowment is set aside for particular purposes, such as endowed professorships or programmes (and, for example, £1.4bn of our balance sheet consists of the buildings the University uses). But the University has discretion over a substantial amount, and we also have the proceeds of the 2017 Bond that we took out to help with our academic endeavour. Both of these sources of capital could be brought in to play in this crisis. So our working assumption for 2020/21, is that once we have taken sensible decisions in relation to our first three mitigations, we will plug the gap with a one-off draw on reserves.

This way of looking at things is illustrated in the waterfall diagram below (figures on the right-hand side are indicative):

2020-21 Budget - Bridging the gap - a chart showing mitigations to offset lost income, including operating cash, capital grant, IT and minor capital spend, and local and PVC level reviews of operations and payThis graph shows how mitigations can off-set the budget gap.

Overall, particularly given the current level of uncertainty, I think this is the most reasonable way to proceed. Take time, make sensible decisions, fall back on our reserves as necessary . . . and think about the longer term once the impact of the virus becomes clearer.

There are three caveats to that.

  1. First, Scenario 1 assumes that (despite the anticipated shortfall) the majority of our undergraduate and postgraduate students will arrive at or return to the University in the autumn. That relies on our understanding of their anticipated behaviour being right, and also on our ability to accommodate them and provide them with the exceptional education they deserve. We are working on how to achieve this through the Michaelmas Coordination Group, but everyone has a contribution to make – in particular the colleges, departments, libraries and numerous individuals across the University.

  2. Second, what I have set out above applies to 2020/21. Some of the impacts under Scenario 1 will endure for several years. So although the financial challenge will get smaller, it will not go away. It will be one of our tasks over the coming months to think harder about that.

  3. Third, what I have set out above is a fairly benign, or optimistic scenario. It assumes we will get back to something like normal in the autumn, and things will get better as we move forward. But as I said at the beginning of this note, we are also thinking about Scenarios 2 and 3, which anticipate an ongoing health and economic crisis lasting many months or longer. Under those scenarios our income – in particular, fee income and income from the endowment and OUP – will be progressively harder hit. At this stage I do not recommend taking action in anticipation of these scenarios. It would impose unnecessary damage and hardship without the evidence to justify it. But we have to think about it, so that if the worst happens, we will be ready with the beginnings of a plan. Council will turn to these scenarios in the autumn when we will know more about the virus and the economy.

Finally, we are doing all this in line with our normal governance procedures. The 2020/21 planning round is similar to any other planning round, only quicker and with more challenging targets. The budget will be put to PRAC in the normal way on 30 June. The budget will identify the gap that needs to be plugged from reserves and this will be put to Finance Committee on 1 July. With the benefit of recommendations from PRAC and Finance Committee, Council will take decisions on the 2020/21 budget on 13 July. Council will then return to longer term financial issues in the autumn.

I know this is a time of uncertainty for everyone with concerns and worries about health, the economy and the well-being of our families. But we are lucky to be working for a University that is an excellent employer and which has the financial flexibility to cope with change. We have to hope that Scenario 1 is indeed the closest to reality of the three we have identified. But I also hope that what I have set out above gives you confidence that we are going about our financial planning in a measured and responsible way.

David Prout
Pro-Vice-Chancellor for Planning and Resources
University of Oxford

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