Misleading and Partial Data in Management’s “Crisis” Narrative
In this latest post from the Joint Unions Finance Working Group, we look at some of the specific assertions that have been central in the “crisis” narrative senior management has presented to justify cutting staff. The points below are based on publicly available data and on data to which all staff have access. Joint Unions have still not been given access to the most recent financial year’s audited accounts, or to the projections underlying some of the claims management is making, so this is a reconstruction based on available figures.
The headline points of this post are that a number of management’s claims on UoE finances appear to overstate costs and understate the contribution that staff make to the level of surplus that they claim is needed for the University’s future. In some cases, management’s underlying assumptions and projections for future revenues appear to be based on worst-case scenarios, rather than realistic modelling.
We always welcome corrections and clarifications to these posts. We’d really like to have full transparency on the finances, so that we could understand the situation the University faces, and assess how to deal with it.
There is a lot more to say, and more to explore. Please do get in touch if you have ideas.
NB: Notes in the text are at the end of the post.
1. “Staff costs are 60% of our expenditure”
This appears to be a significant overstatement, as shown in the graph below. Staff costs have consistently been below 60% in the last 5 years, with the latest available data being 55% in 2023. Due to significant reduction in employer USS pension contributions in 2024, from 21.6% to 14.5% of salary,[1] and similar announced changes for the SBS pension scheme, this financial year and the next should show a further drop, or at the least a steady state due to the grade scale changes.
Source: UOE Annual Report and Accounts 2022/23, p.112. Excluding USS provisions.
2. “The university costs £120 million per month to run”
The available figures don’t appear to support this claim. The cost of running the university was £107m/month in 2022/23, as presented in the graph below. If the figure has increased to £120 million, what caused the costs to balloon by 12% in one year of low inflation? The staff costs have not seen a comparable increase.
Source: UOE Annual Report and Accounts 2022/23.
3. “We have 12,500 FTE staff, up 12% from 2 years ago”
In the four months since the 2.5% across the board cut in budgets and the imposition of an effective hiring freeze, there has already been a reduction of 175 FTE staff, corresponding to a 1.37% year-on-year shrinking in staff numbers, second only to the change caused by the pandemic. Staff numbers are already declining, even before the launch of the voluntary severance scheme.
Source: HR database “University Standard Staff Population Summary”.
4. “The university needs an EBIDTA[2] of 5% to break even”
This has not been the case in recent years, as the graph below reveals. In our view, the 5% “break even” value for EBIDTA is set unjustifiably high. The graph below presents a historical calculation of this measure, which has been computed as “(depreciation + amortisation – capital grants)/(total income)” over the years for which data is available.
Source: UOE Annual Report and Accounts, various years.
We also question the use of the EBITDA margin as % of total income in establishing a “break-even” target. Management have not given a clear definition of “break-even EBITDA”; we can reasonably infer that this is the amount (in £) needed in a particular year to pay for interest, depreciation, and amortisation (the ITDA part of EBITDA), that is, the money needed to not be in deficit after paying these costs. This is the numerator in the formula above. However, these costs depend on assets, not on income. For example, if (miraculously) the income of the university doubled overnight, would we require twice as much money (5% of the new income) to cover the same amount of depreciation and amortisation? Obviously not. The EBITDA margin is a terrible indicator of the financial health of the university, and the 5% “break-even” target is completely arbitrary and nonsensical.
5. “The core business of the university generated only £8m surplus out of a total of £94m”
We do not believe this to be a correct representation of the contribution of “core activities” of research and teaching to generating surplus at UoE. In our calculations, from 2018 to 2023, the core business of the university (teaching and research) has brought in substantial surpluses. It is also questionable to disaggregate the surpluses of Accommodation, Catering and Events from the ones generated “directly” from teaching and research: these activities only generate revenue if we have taught students living in University accommodation; staff hosting research events in University venues, catered by ACE; people using cafes on campus; etc.
In the graph below, core business income is computed as tuition fees + funding body grants + research grants and contracts, and core business spending is computed as all operating expenses excluding “Other including income generating operations” and “Residences and catering operations”, plus 85% of total staff costs. The proportion of total staff costs has been estimated on the basis that 70% of staff work in UoE’s three colleges.
Source: UOE Annual Report and Accounts, various years.
6. “The UK government increase in National Insurance contributions has significant financial impact”
This claim has been made repeatedly in communications from senior management, and in the all-staff meetings in November and December, in which management told us this increase would cost £5 million for this year and £12 million in future years. However, our analysis shows that the increase represents a negligible amount. The graph below shows the increase in relation to other expenditures.
However, it is interesting to note that the annual remuneration of the 12 members of the Senior Leadership team corresponds to a substantial proportion of the changes in NI contributions.
7. On current financial trends, UoE could have insufficient cash
In the all-staff meeting on 10 Dec., the graph below was presented as showing that there was a risk that the University would have insufficient cash to cover its liabilities if budgets were not cut. This slide is also available in the SharePoint on finances and the voluntary severance scheme to which all staff have access.
We have created our own version, based on a longer time frame, in the graph below. Blue bars are audited numbers, orange bars are the forecasts, and the dashed line is the requirement to have sufficient cash on hand for 100 days, used in the management version. It is interesting to note that the current cash reserves for this year and the forecasted reserves of next year are perfectly in line with historical trends. The fatalistic predictions seem to come from “worst case scenario” assumptions, showing a financial future at UoE worse than during the global financial crash. At a minimum, any projections should show appropriate error bars or confidence intervals; it is incredibly misleading to present projected numbers 5 years into the future as if they were a certainty.
Source: Five-year tracking data in UoE financial reports, available at: https://uoe-finance.ed.ac.uk/annual-report-and-accounts/archive
More coming soon… watch this space!
20 December 2024
Joint Unions Finances Working Group
Endnotes
[2] This measure of the University’s surplus stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. See our first post for more discussion.
