The Financial Capacity of the University of New England to offer salary increases

A response to the NTEU's paper of 9 May 2000

Summary

• The University understands the concerns of staff regarding the importance of matching salary increases in other Universities. However, a major problem exists in that the NTEU has demanded unconditional salary increases to a level which this University is unable to afford. The impact of such an increase on the quality of this institution would be devastating.
  
• As Andrew Norton, a research fellow at the Sydney based Centre for Independent Studies (a right wing think tank), stated in the Campus Review of 22-28 March, 2000:

'At the very best, the pay deal the NTEU is getting Vice-Chancellors to sign up to mean that standards will drop and universities' financial positions will deteriorate, at worst some universities will become insolvent, exposing the flaws of the current system in the most brutal and unfortunate way.' …. (1)

• Despite management providing to the NTEU over the last 6-7 month, evidence of the constraints on the University's finances and despite two independent consultants' reports confirming the University's tight financial position, the NTEU continues to claim that its analysis is superior and that UNE does have the capacity to fund salary increases. This claim is based on cash surpluses that have been achieved over the last four years. The University has pointed out that a substantial proportion of the surpluses has been made up of 'tied' funding, that is, funding not available for salary increases.
  
• The NTEU continues to challenge this point and in its paper of 9 May, 2000 provided comments and supporting calculations derived from the University's financial statements to support its position.
  
• This paper will identify a major flaw in the NTEU's argument based on a serious omission in the NTEU's calculations of the level of restricted funding referred to in the 1999 financial statements and other supporting documentation.
  
• The NTEU opinion therefore that the University has the capacity to find its requested salary increases remains unsubstantiated.
  
• The NTEU is requested to acknowledge the constraints to funding unconditional salary increases to the level demanded and to work with the University in achieving an Enterprise Bargaining outcome that will provide opportunities for staff to achieve parity with other institutions through the inclusion of such things as contingency based increases and salary packaging.
  
• The NTEU paper of 9 May, 2000 also makes comments on a range of issues relating to the debate of the University's capacity to fund salary increases. Some of these comments are relevant, others are not.
  
• This paper responds to all issues raised by the NTEU, however, focuses very much on the points that are central to the debate.

Response

1. 'The Vice'Chancellor is to be congratulated for bringing into the public domain a debate on the quality and interpretation of the financial statements published by the University of New England.

The debate is NOT on the quality and interpretation of UNE's financial statements. It is on the financial capacity of UNE to fund salary increases. This requires an analysis of more than just financial statements. It requires an analysis of all the material that has been provided to the NTEU Bargaining team over the last seven (7) months. This has included financial statements, as well as strategic plans, budget principles, independent financial reports, monthly management reports, reports on legal compliance, due diligence and risk management.

Decisions regarding this University's capacity to fund salary increases can only be made when there is a clear understanding of the impact that the salary increases are going to have on the variety of activities that contribute to the quality of this Institution.

2. 'Graeme Dennehy sets out to provide evidence of UNE's financial distress, but fails to do so'.

Graeme Dennehy did NOT set out to provide evidence of UNE's financial distress. This statement by the NTEU is at odds with the statement made by the University in the paper of 8 May that "The University has moved from a financially unstable position to one of stability'. The term 'financial distress' is one that was used by the author of the NTEU's original paper not by Mr Dennehy. What the University's paper more accurately set out to achieve was to provide evidence that the University is still heavily constrained due to the high level of debt, low liquidity, unfunded provisions, OH&S and Environmental obligations and the lack of Government salary supplementation. The NTEU's paper refutes this statement. A response to the points made by the NTEU is provided in the following paragraphs.

3. 'High level of debt'

Once again, the NTEU paper chooses to ignore the full context of what the University has been saying about the level of debt and that is, the University is restricted in identifying funds for salary increases due to the level, terms and conditions of its borrowings. The reason for this is that over the period from 1993-1995 the University borrowed $25m to fund capital projects. The loans were to be paid back over a very long period of 13 years at what turned out to be a relatively high level of interest. The University committed all of its available capital roll-in funding of $4.7m to service these loans. This action therefore left no capacity for the University to address the high level of deferred maintenance ($20m) that had built up over many years but could have been funded by the capital roll-in funding. The University in 1997, under Professor Nairn, was forced to identify $2m from its operating funds to pay for urgent deferred maintenance items such as asbestos removal in the library and fume cupboard replacements as well as a number of other OH&S projects. These OH&S issues still need to be addressed as well as the emerging costs of a number of environmental issues that have recently been identified and are currently being costed. The University has very little choice in addressing these issues. While reduction in the minor works program will occur, even for the past 7% unconditional component of the University's offer, there is a limit to the amount this figure can be reduced.

The NTEU are also reminded of the advice that was provided previously on the matter of refinancing the University's debt.

There has been a suggestion that by extending the period of the current loan to say 25 years, that the repayment could be reduced, thus freeing up funds for salary increases. This is not an option for the following reasons:-

i. T-corp, the State government lending authority, has informed the University that to extend the loan period, the University would need to pay out the existing loans inclusive of all interest due through to the end of the original agreed term. The University would then be required to pay interest on the new loan over the same period. This would result in the significant penalty of paying two lots of interest payments for the same period.

ii. The extension of the loan period would require the committing of the capital roll-in funds for a further term which would result in a continued lack of capacity to address the existing and emerging OH&S and environmental concerns.

4. 'Low Liquidity'

The University's position is that it is heavily constrained in identifying funds for salary increases by its low liquidity.

The NTEU in its comments on liquidity levels chooses to ignore the fact that the current asset figure used in their calculations include a high level of tied funding i.e. funding that can only be used for specific purposes. When this figure is deducted, it leaves an unacceptably low level of operating funding for an institution of the size of UNE.

Concern was expressed regarding this matter by the consulting firm Arthur Andersen in its independent report to the Finance Committee of Council of 23 September 1999.

The tightness of UNE's liquidity position has been further emphasised by the release of the recent McKinnon Benchmarking report (independently commissioned by DETYA for the use by all Universities) where it explicitly states in its commentary on liquidity that:

'Commitments (e.g. for tied research, scholarship funds) which are held in current assets should be taken into account, that is, deducted before deriving the ratio.' (2)

With respect to a University's quick ratio the report states that:

'A rule of thumb might be that liquid reserves (less commitments such as scholarships, tied research grants) should be a minimum of 6 fortnightly total salary and on-cost commitments'….(3)

Once 'tied' funding is deducted from current assets, UNE's current ratio and quick ratio are as follows:-

Liquidity UNE - The University

1995 1996 1997 1998 1999

Current Assets/Current liabilities 0.1, 0.2, 0.5, 0.6, 0.5

Best practice safety margin: 1.5 to 3.0

Good practice Good practice is a current ratio of more than 1.5 to less than 3.0. Less than 1.5 provides a margin too low to provide safety and results in an overly tight cash flow. Too high a ratio (over 3.0) indicates surplus funds for which some use should be found, either in expanding the range of university activities or in longer-term investments with reasonable yields. Commitments (eg for tied research grants, scholarship funds) which are held in current assets should be taken into account, that is, deducted before deriving the ratio. Levels 1 A current ratio of < 1.0 or > 3.0 2 3 A current ratio of 1.0 to 1.5 4 5 A current ratio of > 2.0 to < 3.0   Self assessment: 1

Quick Ratios

Liquid cash reserves ($'000's):
Actual:	-5,271 -2,506 2,799 5,735 4,250
Recommended minimum (6xF/N Pays):	19,611, 18,601, 18,995, 18,343, 18,595

Liquid cash reserves ($'000's):
Liquid cash reserves as % of Current Liabilities	-18%, -13%, 12%, 22%, 19%
Best practice safety margin:	80%, 80%, 80%, 80%, 80%

Good practice A positive percentage is an indicator of good practice. Universities need to examine the level of uncommitted funds (after regular outgoings such as salaries and the debtors turnover rate are taken into account) which they have available. A rule of thumb might be that liquid reserves (less commitments such as scholarships, tied research grants) should be a minimum of 6 fortnightly total salary and on-cost commitments. Levels 1 Figure for liquid reserves as a percentage of current liabilities is negative 2 3 Figure for liquid reserves is almost always positive 4 5 Figure for liquid reserves as a percentage of current liabilities is substantially positive Self assessment: 2

Both ratios are significantly below acceptable levels and require strategies to be put in placed to achieve increases.

As the University has consistently stated, this requirement places a heavy constraint on UNE's capacity to fund salary increases in the short term.

5. 'Restricted' Funding'

Paragraphs 13, 14 and 15 of the NTEU paper question firstly the University's estimation of restricted funding; secondly, apart from funds held in advance and funds held in trust, whether any other restricted funds actually existed; and thirdly, if they did, why were they not included in the financial statements.

The simple response to this issue is that the NTEU and their adviser have either made a mistake or are attempting to mislead their members. Restricted funds are acknowledged in the Financial Statements under Note 10, where it states -

'Restricted Equities represent funds generated by academic activities from external sources and are designed to permit the augmentation of research and academic activities. These funds remain the property of the University. They have been included in general Accumulated Funds…..(4)

The NTEU has also been provided with supporting documentation that provides full details of the categories of these restricted funds.

The balance of restricted funds as at 31 December 1999 was $14,144,000. Thus adding this figure to the $7,426,000 identified by the NTEU as restricted cash in advance and cash held in trust results in a total restricted funds level of $21,570,000.

The ratio of restricted cash to total cash balance at 31 December 1999 was $21,575,00/27,578,000 i.e. 78.2%, substantiating the University's position 'that a significant component of surplus funds are not available for general use'.

The lack of acknowledgment by the NTEU of the existence of these restricted academic funds is central to the debate on the University's capacity to fund the salary increases demanded by the NTEU. It is a serious omission. Refer to the paragraph on 'Cash Flow'.

6. OH&S and Environmental Obligation

There is substantial documentation to prove that OH&S, Environmental and access and equity obligations exist. It is clearly obvious to those that have the slightest knowledge of the legislation. An inspection of the condition of the University's fume cupboards would provide ample evidence. Whether these items are included in the University's financial statements is a matter not relevant to this debate.

7. Lack of Government Salary Supplementation

The position of the University is not that UNE is financially distressed. The position is that it is financially constrained by a number of factors including the Government's decision not to provide salary supplementation.

8. 'Financial Distress'

The points made in paragraphs 8 and 9 of the NTEU's paper are irrelevant to the debate as Mr Dennehy did not set out to prove that UNE is financially distressed.

9. Cash Flows

The NTEU paper focuses on cash flows as an indicator of UNE's capacity to fund salary increases. It states that because UNE has achieved surpluses over the last four years, it has the capacity to pay for increases in salaries. The University's position is that a significant component of the surpluses are not available for salary increases because they are restricted for specific purposes. The problem with the position taken by the NTEU is:-

i. That it incorrectly calculated the amount of tied funding. (The NTEU calculation relating to the amount of tied funding was fundamentally flawed by excluding the amount referred to in the financial statements and other supporting documentation provided by the University relating to Restricted funds - see earlier paragraph concerning 'Restricted' Funding); and

ii that it assumes that surpluses can continue to be achieved in future (This is despite the evidence provided relating to the likely deficit cash position in 2000).

The opinion formed by the NTEU therefore cannot be substantiated. The author of the NTEU paper considers his analysis superior to that of:-

a. Arthur Andersen, an independent consulting firm that was commissioned by UNE in September 1999 to provide a report to the Finance Committee of Council on the University's liquidity, and

b. Deloitte Touche Tohmatsu, an independent consulting firm that was commissioned by DETYA to provide a report on the financial status of Australian Universities.

Both of these studies identified concerns with UNE's financial position. In addition, the recent McKinnon Benchmark report highlights clearly the constraints associated with the University's cash flow and validates the University's position that it lacks the capacity to pay the salary increases requested by the NTEU.

References

(1) Norton, A., Campus Review', March 22-28, 2000 p.3

(2)&(3) McKinnon, D.R., Walker, S.H., Doris, D. 'Benchmarking, A manual of Australian Universities' pp. 54-56

(4) 'University of New England Annual Report' 1999 p. 121