OXFORD UNIVERSITY
GAZETTE
UNIVERS ITY OF OXFORD:
FINANCIAL BU DGET FOR 2006–2007
S U P P L E M EN T ( 3 ) TO NO . 4 7 83
W E D N E S DAY, 18 OCT OB ER 2 0 0 6
Contents
Summary outcomes for 2006–7
244
The public funding context and the central
allocation of resources
244
Key financial assumptions for 2006–7
244
Comments on the budgeting process
for 2006–7
244
Income and expenditure budgets:
University summary
245
Medical Sciences
246
Social Sciences
246
Mathematical, Physical and Life Sciences
246
Humanities
247
Continuing Education
247
Academic Services and University Collections
247
University Services and Administration
247
Council Departments
247
Estates
248
Capital expenditure plans
248
Comments on cash flow and the
balance sheet
248
The 2006–7 budget and longer term
financial trends
248
243
244
Oxford University Gazette · Supplement (2) to No. 4783 · 18 October 2006
Summary outcomes for 2006–7
In the face of significant cost pressures from several
sources and the need to invest ahead of the RAE, Council
has decided to set a deficit budget for 2006–7. The University budget has for several years been finely balanced
at close to break-even level. In 2006–7, necessary new
investments in academic staff and other areas of £10.1m
together with the impact of the single spine have resulted
in a budgeted deficit of £8.9m. General cash reserves set
aside in previous years will be called on to finance this
deficit.
Several of the University divisions have relatively strong
financial positions with small deficits and healthy reserves. These include Medical Sciences and Social Sciences. Other divisions have weaker financial positions
that will require concerted efforts to remedy. These include Mathematical, Physical and Life Sciences (MPLS),
Academic Services and Collections (ASUC) and University
Services and Administration. Plans to address the financial position will be developed in each of these areas and
to support and supplement this work the University is
already turning its attention to planning for 2007–8 and
beyond to ensure that the longer-term trend once again
becomes positive.
The public funding context and the central allocation
of resources
In March HEFCE announced that the grant allocation for
the Higher Education sector had increased by 5.9 per cent
compared with 2005–6. Oxford University was awarded a
headline total grant figure of £159.6m, giving a like-forlike increase of 6.5 per cent. This comprised a 3.2 per cent
increase in total teaching funds and an 8.6 per cent increase in headline research funding, thus continuing the
trend established over the recent period of greater increases in funding allocated to research than to teaching.
As in previous years, the total grant figure was allocated
to departments throughout the University in accordance
with the principles of the Resource Allocation Model
(RAM). These principles are well established and the
process is straightforward. The 2006–7 HEFCE grant was
first adjusted by deducting lines of funding for specific
purposes such as widening participation and minority
subjects, before being supplemented by the estimated
amount for home and European Union student fees, including, for the first time, the estimated amount for the
new variable fee. The resultant total for allocation in
2006–7 was £177.3m and with the inclusion of £5.8m for
the new variable fee was 9.3 per cent higher than the
equivalent figure for 2005–6. From this amount a ‘topslice’ amounting to £60.4m is taken before allocating the
remaining sum to departments of the University. The
largest component of the top-slice is the college fee transfer (also referred to as the ‘quantum’) of £43m. The remainder of the top-slice includes the estimated cost of
undergraduate bursaries of £1.9m, £2.3m for museums,
£4.6m for University Services and Administration and
£6.0m for libraries.
The balance of the total for allocation is first split in
the ratio 60:40 between research and teaching before allocation to departments using various allocation drivers
related to staff numbers, student numbers and space
occupied.
Important features of the 2006–7 allocation process included the ending of moderation and the end of supple-
mentary funding grants. The process of moderation was
originally introduced as part of the RAM in order to temper the impact of the allocation drivers on certain departments, and had the effect of ‘taxing’ the RAM allocation
for Medical Sciences and redistributing funds to other
departments, most notably those within Mathematical
and Physical Sciences and Life and Environmental Sciences. Moderation has gradually been phased out over the
life of the RAM and as planned came to an end in 2005–6,
with the result that no moderation was applied in 2006–7.
Supplementary funding grants of a more ad hoc nature
were awarded by the Planning and Resource Allocation
Committee (PRAC) in order to alleviate particularly difficult funding outcomes in certain divisions. PRAC decided
not to apply this ad hoc measure in 2006–7.
The other key part of the central allocation process is
setting the amount of inflationary increase applied to the
internal charges (known as the infrastructure charge)
made by services such as the libraries and University
Services and Administration to the academic divisions.
For 2006–7 PRAC decided to increase the infrastructure
charge by a core inflationary increase of 5 per cent, and
in addition sought to make special investments in the
development office and public affairs and in funding
more repairs and maintenance. Incremental funds of
£3.4m have been awarded to the development office over
and above the core 5 per cent inflationary multiplier in
order dramatically to improve the University’s fundraising capabilities. Secondly, £1.0m of new funds has been
allocated to repairs and maintenance. The University has
an estate of some 520,000 square metres and recent benchmarking work suggests that the current spend on repairs
and maintenance is around one third of the ideal amount.
Whilst the University cannot afford to triple the current
repairs and maintenance spend of approximately £10m
per annum, a 10 per cent real increase is at least a step in
the right direction. As a result of these areas of investment
over and above the core inflationary allowance of 5 per
cent, the overall increase in the infrastructure charge is
9 per cent.
Key financial assumptions for 2006–7
In April, following the receipt of the grant letter, planning
guidelines were published to divisions and departments.
The guidelines contained details of the RAM allocations
and other key financial assumptions to be used in drawing
up departmental budgets together with spreadsheet
based financial templates to aid detailed budgeting. The
most important financial assumptions concerned pay
costs, and departments were asked to make a central
assumption of a 3 per cent pay increase for all staff in addition to applying an inflationary multiplier to take account
of the introduction of the new national pay framework
commonly referred to as the ‘single spine’. The impact of
the single spine varies by grade and category of staff. On
average it is expected to add a further 3 per cent inflationary pay impact with 4.3 per cent for Lecturers, Readers and
Professors. In effect therefore there is double the usual impact from pay cost inflation in 2006–7, and as we shall see
later this has a significant impact on the overall University
budget.
Comments on the budgeting process for 2006–7
Much greater stability of the Oracle financial system and
the ability to produce more detailed and meaningful
Oxford University Gazette · Supplement (2) to No. 4783 · 18 October 2006
financial reports have greatly enhanced the ability of the
University to produce a more detailed and comprehensive
budget than ever before. Not to be underestimated,
though, are the very considerable efforts made within departments and within central administration to input
more detailed financial data and to work with the financial system. The outcome is an overall University budget
and three-year trend which can be reconciled to the
audited financial statements of the University and broken
down into departmental level components.
The good progress made with the budgeting process
cannot disguise the fact that the current method of allocating resources does not cope with the systematic underfunding of many elements of the University’s operations.
The first draft of the budget showed a much greater
budget deficit of £22.9m than the revised operating deficit
of £8.9m. In order to achieve this reduced level of deficit,
budget improvement targets of £19.3m were issued to all
divisions and service areas. All areas responded positively
to the requests for budget improvements and £15.8m
of improvements were delivered against the target of
£19.3m. Additional unbudgeted costs of £0.8m and an
overall contingency of £1m have reduced the net improvements to £14m. Clearly, however, even the reduced level of
operating deficit is unsatisfactory on any continuing
basis.
Income and expenditure budgets
Income and expenditure budgets have been prepared for
each department and consolidated to produce the overall University budget. For comparative purposes actual
figures are available for 2004–5 and forecast figures for
2005–6.
University summary
2004–5
Income
530
Surplus/(deficit)* 4.5
2005–6
584
0.0
2006–7
638
(8.9)
* Operating surplus before exceptional and one-off items.
The budgeted growth in total income is very strong at
9.8 per cent and is influenced partly by the addition of new
activities at the Saïd Business School, the Jenner Institute
and the Grey Laboratories. The underlying rate of growth
in income before additions is 8 per cent. Research income
including overheads is forecast to grow by over 9 per cent,
and, as a result of the new variable fee, student fees by
13 per cent. Despite the strong growth in income, the University is facing a combination of investment needs and
unusually high cost inflation in a number of areas, resulting in an overall budget deficit of £8.9m.
The University has been relatively close to break-even
for several years. The following chart shows the historical
trend both as reported and as adjusted for one-off items
such as the profits from the sale of spin-out company
investments.
In 2000–1 and 2001–2 the University was in surplus before and after deducting one-off items. 2002–3 was a year
in which income growth was relatively low, and in particular the total HEFCE grant income (recurrent and nonrecurrent) increased by only 1.37 per cent. At the same
time, non-contract research expenditure increased by
8.6 per cent. The financial outcome of the last RAE exercise
was not particularly favorable to Oxford and 2002–3 was
the first grant year to which the current RAE quality
245
weightings were applied. In that year the research grant
fell by 0.06 per cent. In 2003–4 and 2004–5 the HEFCE
grant settlements were more closely aligned with the
growth in expenditure, but the University was unable to
recover from the impact of the decline in the 2002–3
grant.
Moving to 2006–7, the following table provides an overall explanation of the budget deficit for 2006–7.
Reconciliation of the forecast deficit for 2005–6 to the budgeted
deficit for 2006–7
£m
£m
Forecast deficit 2005–6
0
Changes in income
—increased HEFCE grant
11
—increased trust fund income
5
—increased variable fees
6
—increased student fees
(other than home/EU)
4
—assumed additional FEC income
5
—increased donation income
(incl. £2m from OUP)
4
—growth in core research income
19
—additions (incl. Said, Jenner,Grey)
6
—less one-off FEC grant
(6)
54
Changes in expenditure
—increased pay costs due to
additional staff including
investment in development office
and RAE and additions
—increased pay costs due to inflation
—other non-pay increases including
investment in repairs and
maintenance and the development
office
—increased contract grant expenditure
—increased quantum settlement
—cost of new bursary scheme
—increased utility costs
Budgeted deficit 2006–7
(11)
(13)
(15)
(19)
(2)
(2)
(1)
(63)
(9)
A number of the items in this table have significant
new impacts on the budgetary position of the University.
The variable fee is expected to bring in approximately £6m
of new income in its first year of operation, rising to
approximately £18m after three years. Partially offsetting
this benefit is the additional £2m cost of the new bursary scheme in the first year, rising to £6.5m after four
years.
One of the more uncertain aspects of the budget is the
impact of FEC. For 2006–7 the year-on-year impact of FEC is
likely to be slightly adverse, because a one-off FEC grant of
£6m was recorded in 2005–6. In future years we would ex-
246
Oxford University Gazette · Supplement (2) to No. 4783 · 18 October 2006
pect FEC to have a significantly beneficial effect but there
remains considerable uncertainty as to the amount and
timing of additional funds.
The £11m of increased pay costs resulting from additional non-contract research staff is equivalent to approximately 200 new heads across the University. Much of the
new investment in headcount relates to recruitment
needed to strengthen the academic quality of several key
departments across the academic divisions ahead of the
RAE. Of the approximately £140m of staff costs in divisional budgets (excluding externally funded research)
approximately £5m has been identified as investment for
the RAE in 2006–7. £3.8m of this is the 2006–7 element of
the total of £12m made available by PRAC for restructuring and new academic development and a further £1.2m is
being made available from departmental funds.
A further important element of increased headcount is
the investment being made in the Development Office. In
total £3.4m of new funds is being made available to
strengthen substantially the operation of the development office with a view to radically improving the scale of
the University’s fundraising. As with investment ahead
of the RAE the University is expecting to see a longer term
return from the investments planned for 2006–7.
The final major component of the budgetary shift in
2006–7 is the effect of pay inflation brought about by the
normal annual inflationary pay increase of 3 per cent
(equivalent to £6m) on top of the impact of the new
national pay scheme or ‘single spine’. The single spine is
expected to add approximately £6m to the non-contract
research funded cost base, roughly doubling the annual
impact of pay inflation. There is some uncertainty here,
especially with respect to future years. The budgetary
assumption is that single spine costs of contract research
will be fully recovered from research sponsors. Although
the move to the single spine adds to the inflationary impact in 2006–7, future years should benefit from the introduction of more cost-effective working arrangements as
part of the national settlement.
Some of the budgetary impacts noted above represent
step-changes in the University cost base. For example,
RAE investment, development office investment and the
single spine represent a step up to a new level of expenditure, and the University would not expect to see comparable step-ups in 2007–8. However, other impacts will
continue to accelerate. Most notably, the annual pay
award has now been negotiated on a national basis
through to 2008. We can therefore anticipate further
inflationary rises in pay costs of 1 per cent on 1 February
2007, 3 per cent on 1 August 2007, 3 per cent on 1 May 2008
and 2.5 per cent (or RPI if greater) on 1 October 2008. With
this level of inflationary multiplier effectively already
committed across more than 50 per cent of the total University cost base (i.e. pay costs) future budgets will continue to be challenging.
Transfers received from OUP have become increasingly
important and in 2006–7 the budget includes a revenue
transfer of £36.6m. £5m of this amount is to pay for the
Clarendon Scholarship program and a further £5m is earmarked for the John Fell research fund. The remaining
£26.6m is transferred to strategic reserves and is being
used to make new strategic investments and to meet funding shortfalls in 2006–7.
Turning to individual academic divisions and services
areas, the following pages provide more detail area by area
of the budgets for 2006–7.
Medical Sciences
Income
Income per head
Income per square metre
Surplus/(deficit)
2004–5 2005–6
182
196
6
2.7
2006–7
204
85,000
2,731
(1.8)
Medical Sciences is the largest academic division, representing almost one third of total University income and
expenditure. It has some 2,400 staff and some 74,000
square metres of chargeable space for infrastructure
charge purposes. In the previous two years the division has
produced sizeable surpluses. In 2006–7 despite a strong
RAM settlement the division expects to have a deficit of
£1.8m but to return to surplus thereafter. In common with
other divisions the double pay inflation impact is
significant, adding £2.4m to the cost base, and RAE investment is the largest single factor driving £1.3m of extra
costs due to new staff. In addition, the division is facing
some £1m of incremental utilities costs, partly as a result
of NHS charges.
The comparatively robust financial position of the division is reflected in the healthy ratio of income per head at
85,000 and the level of income per square metre of chargeable space at 2,731.
Social Sciences
Income
Income per head
Income per square metre
Surplus/(deficit)
2004–5 2005–6
55
64
(0.4)
(0.5)
2006–7
73
90,000
2,962
(0.8)
Social Sciences is expected to continue to grow strongly in
2006–7 with total income up by 14 per cent. In 2004–5 the
divisional budget was almost in balance. The division
leads the way in attracting overseas students and expects
to earn 30 per cent of its income from overseas and other
student fees in 2006–7. The average across the University,
by way of comparison, is 10 per cent. The original forecast
for 2005–6 indicated a £0.5m deficit but the Division now
expects to do a little better and may earn a small surplus.
For 2006–7 a small deficit is planned in view of the RAE
investments and double impact of pay inflation.
Mathematical, Physical and Life Sciences (MPLS)
2004–5 2005–6 2006–7
Income
111
112
117
Income per head
71,000
Income per square metre
1,425
Surplus/(deficit)
(1.3)
(1.9)
(9.1)
MPLS faces significant financial challenges. Total income
is virtually static, costs are increasing as for all divisions,
and structurally the division is earning too little income
per square metre of chargeable space occupied. At more
than 87,000 square metres of chargeable space occupied
the division has a similar footprint to Medical Sciences
with 44 per cent less income.
Latest estimates for 2005–6 indicate that the Division
will do better than the forecast deficit of £1.9m but there
is little doubt that the situation will worsen in 2006–7. In
addition to the cost increases faced by all other divisions
and discussed elsewhere in this paper, the division has absorbed two departments, Zoology and Plant Sciences,
Oxford University Gazette · Supplement (2) to No. 4783 · 18 October 2006
which are in deficit. It has also suffered from the end of
moderation and the loss of one-off FEC grant income and
no longer receives £2.6m of supplementary funding allocated in 2005–6.
Humanities
2004–5 2005–6
Income
Income per head
Income per square metre
Surplus/(deficit)
33
36
(0.8)
(0.5)
2006–7
40
65,000
3,517
(0.4)
In common with the previous two years, Humanities is
budgeting for a small deficit in 2006–7. For 2006–7 this has
only been achieved through stringent attention to costs.
The 2006–7 RAM settlement was relatively healthy, with
10 per cent more funds made available. Because it has the
largest number of students, Humanities received the
largest proportion of the new variable fee, helping to fund
new RAE investment.
Continuing Education
2004–5 2005–6
Income
Income per head
Income per square metre
Surplus/(deficit)
15
13
2.9
(0.3)
2006–7
14
69,000
1,368
(0.6)
Continuing Education has historically been able to run at
a surplus but faces similar cost pressures to the divisions
in 2006–7. Around 70 per cent of income comes from student fees and a further 16 per cent from the RAM settlement. For 2006–7 Continuing Education was adversely
affected by the ending of moderation and suffered a 5 per
cent drop in RAM income as a result. This, in combination
with the double pay inflation, has led to a budgeted deficit
of £0.6m. Relative to its size, however, Continuing Education has healthy reserves and is aiming to return to a
balanced budget in 2007–8.
Academic Services and University Collections (ASUC)
2004–5 2005–6
Income
Surplus/(deficit)
45
(0.4)
44
(3.0)
2006–7
46
(3.4)
Despite 4.5 per cent more income available in 2006–7, the
cost pressures from the double pay impact, higher space
costs (87,000 square metres of chargeable space) and
double digit increases in the cost of some materials
result in a worsening deficit in 2006–7. £3.1m of the deficit
arises in the Oxford University Library Service (OULS).
OULS has developed a long-term financial recovery
plan and is currently in the process of reviewing that
plan.
We may now turn to areas of University activity that
focus primarily on providing services to the academic divisions but which have limited external income-generating
capacity.
University Services and Administration
University services include veterinary, biomedical, operating central computer systems, academic and student
administration, research services, property management,
personnel administration, financial transaction process-
247
ing and legal services. University administration includes
the work of the Vice-Chancellor, Pro-Vice-Chancellors,
Registrar, Audit and the senior officers in each service area
including Finance, Academic Services, Planning, the
Legal Office, the Development Office, Public Affairs and
Research Services.
University Services and Administration has a total
expenditure budget of £53.5m and comprises several
departments that are involved in providing services to
departments and divisions, in addition to acting as a central policy-making body for the University and providing
stewardship of its assets.
Over the last few years the demands on University Services both in terms of volume and complexity and the
need to improve quality have steadily increased and the
level of funding has remained fairly static. Between
2005–6 and 2006–7 infrastructure charge and other funding is flat at £38.4m, whilst at the same time new investment is being made and inflationary cost pressures,
particularly in terms of pay costs, are similar to those facing other departments across the University. In order to
meet the costs of these new initiatives and to provide adequate funds for the increasingly complex service requirements, it has been necessary once again to call on strategic
reserves. The funding position is described in the following chart.
University
Administration
University
Services
Professorial
Merit Awards
Investments*
Total
Costs
17.2†
27.8†
4.4
4.1
53.5
Infrastructure
charge and
other funding
14.0
22.9
1.5
Transfer from
strategic reserve
3.2
4.9
2.9
4.1
15.1
Total funding
17.2
27.8
4.4
4.1
53.5
38.4
* Includes Development Office of £3.4m and Public Affairs investment of £0.7m.
† Estimated split of costs.
Strategic reserves are being deployed to support the unfunded element of the professorial merit award scheme
(total costs of £4.4m are part-funded by HEFCE RDS funds
of £1.5m). They are also supporting new investment of
£3.4m in the Development Office in order to enhance the
fundraising capability of the University and £0.7m in the
Public Affairs Directorate in order to enhance public
understanding of the University and its aspirations. In addition, strategic reserves are being called upon to address
the under-funding of University administration activities
and the under-funding of University services provided to
the academic divisions.
Council Departments
Council departments include the Careers Service, the
Sports Department, the Proctors’ Office, the University
Club, the Counselling Service, the Learning Institute, the
Sheldonian Theatre and the Childcare Advisory Panel.
Income and expenditure are in balance overall, with income of £9m, and each department with the exception of
the University Club is able to balance its budget. The University Club is in deficit and alternative recovery options
are currently under review. The funding position is described in the following chart.
248
Costs
Infrastructure charge funding
Sales and services
Other
Total funding
Oxford University Gazette · Supplement (2) to No. 4783 · 18 October 2006
£m
8.7
3.3
3.5
1.9
8.7
Estates
The Estates department is to receive enhanced funding
commensurate with the drive to increase the funding of
repairs and maintenance. Of the total £34m budget, £18m
is funded through the infrastructure charge to other departments, £7.5m relates to direct external grants and
£8.5m is the internal recharge of costs incurred on behalf
of other departments. The £18m infrastructure charge is
used to fund departmental costs, to pay for site security, to
pay for rent and rates and £10.7m (up from £9.7m in
2005–6) is to pay for repairs and maintenance across
520,000 square metres of University space. The funding
position is described in the following chart:
Costs
Infrastructure charge funding
Direct grants
Internal recharges
Total funding
£m
34.5
18.5
7.5
8.5
34.5
Capital expenditure plans
In parallel with the budgeting process, the University has
been drawing up a long-term capital plan which provides
for substantial ongoing investment to improve and expand the University’s facilities over the next five years. In
the period from 2005–6 to 2009–10, the University currently plans to invest some £588m in capital projects and
£243m of that investment has already been approved and
committed. This is comparable with the actual spend of
£434m over the preceding five years after allowance is
made for the gradually increasing size of the University
estate.
Included within the five-year plan are many projects
l a rge and small. Some of the larger projects are the redevelopment of the Ashmolean Museum, the new book depository at Osney Mead, a major new building for th e
Biochemistry department, a substantial new cancer res e a rch centre on the Old Road campus, significant refurbishment works at the New Bodleian, new buildings for
Humanities and for the Department of Mathematics on
the RI site, a new facility for the Department of Earth Sciences, expansion of the facilities for microbiological and
e m e rging diseases and expansion of the facilities for clinical and basic neuroscience. For some projects much work is
re qu i red to develop business plans and to comp l e te fund-
raising before approval can be given. Nevertheless 2006–7
will be a year of relative ly high capital expenditure with
some £130m of planned spend as a number of already approved projects move into the const ruction phase.
Comments on cash flow and the balance sheet
Largely as a result of the financial recovery program in the
research billing and cash management areas, the University’s cash position has improved significantly during
2005–6, leaving the University reasonably well positioned
for 2006–7 despite a budgeted operating deficit and
heavier capital expenditure.
University general cash balances
Actual Forecast Budget
2004–5 2005–6 2006–7
Cash flow from operations
(20)
30
9
Net capital flows
(11)
(18)
(40)
Other flows
(36)
(4)
(1)
Net cash flow before financing (67)
8
(38)
Opening cash position
162
95
103
Closing cash position
95
103
65
The above cash forecast indicates the likely swing from
being cash generative in 2005–6 to cash negative in 2006–7
as the benefits from better working capital management
are largely a feature of 2005–6 and the University’s approved capital spending program is geared up. Clearly the
University has limited ability to sustain annual cash outflow at this level without resorting to asset disposals or
increased borrowings. Currently the University has unused and committed borrowing facilities of £75m and
Council has approved the drawing down of £50m of those
facilities as and when required.
The University’s net assets are budgeted to grow to
£1.4Bn by July 2007 and continue to be highly concentrated on fixed assets and endowments. 6 per cent of the
total net assets are in a current asset form capable of being
turned into more liquid assets in the short term.
The 2006–7 budget and longer term financial trends
The University is seeking to invest in important areas such
as the RAE and to expand its fundraising capability. At the
same time it is facing ever-increasing demands for more
and better space and to properly care for the amount of
space already occupied. In 2006–7 these factors have come
together with a three-year fixed inflation deal for pay, the
single biggest part of the cost base, in addition to the impact of the single spine. Taken together this has resulted
in a deficit budget for 2006–7 and all parts of the University must now turn their attention to planning for 2007–8
and beyond to ensure that the longer term trend once
again becomes positive.