Universities manage available funds with great care
Universities manage the public funds they receive in a responsible manner. They do this by applying the majority of their budgets to their core tasks: education, research and the practical application of research results (valorisation). In recent years, universities have successfully reduced indirect costs (overheads) even further.
Financial position of research universities is under pressure
Responsible management of funds also means protecting financial health over the long term. But this is no simple task, due in part to the declining levels of government funding per student. Compared to other educational sectors, the financial position of research universities has deteriorated considerably over the past few years. At present the universities are still in a sound position, but there is no more fat to trim.
Positive results needed to compensate for these issues
The graph below shows that over the past few years, the profitability of a majority of universities was positive – at the end of the year, these universities had money left over. This appears to contradict the assertion that there is ‘no more fat to trim’. However, this is not the case.
The Koopmans Commission, set up by the Ministry of OCW, concluded in 1999 that positive results are necessary to maintain buffer capital. There are several reasons for this:
Universities depreciate buildings and equipment based on historical prices. If universities did not record positive results, they would have to replace depreciated buildings and equipment for the same prices they were purchased for, many years or even decades ago. In light of inflation and the higher requirements for buildings and equipment, this is not realistic: universities must obtain positive results to maintain the level of their facilities.
Universities require significant equity capital to cover financial risks. Previously, risks were limited because a large part of universities’ income was locked in for the long term. Now, a much larger portion of their income is variable and depends on factors such as student numbers, the number of certificates issued and the success of research applications. Universities need higher levels of equity capital to compensate for the increased uncertainty (and the associated risks).
Universities regularly have to invest large amounts in (new) buildings and laboratories. They are then faced with a choice: save the money first, or borrow money and pay it back later. If a univeFinanrsity chooses to borrow, it has to pay interest for a lengthy period. This means that these public funds cannot be used for the core tasks of education, research and the practical application of research results. Of course, when interest rates are high, it is preferable to save.
Incidentally, the above diagram shows that the liquidity and profitability of each university can fluctuate quite wildly over the years. One reason is that universities often have multiple buildings that were built around the same time. This means all of these buildings require major maintenance, renovations or replacement within a short period. This has a major impact on university expenses and the amount of money the university has left over.