Universities' finances worse than they appear, two unis at high risk, report says

Universities' finances are worse than they appear, a commercially sensitive Tertiary Education Commission briefing paper says.

The March briefing, provided to RNZ under the Official Information Act, classified two universities as high risk and cast doubt on sector forecasts of net profits in the next two years.

It also warned a drop in capital spending could cause some universities' facilities to become substandard or even unusable.

The report said the sector's $138 million surplus in 2023 was driven by one-off gains and increased trust fund valuations which hid an underlying deficit of $66m.

"We consider this is more reflective of performance from core operations and the pressure that the sector is facing," the report, for Tertiary Education Minister Penny Simmonds, said.

The eight universities had forecast a collective $42m deficit this year, a figure equivalent to 0.9 percent of their expected income, it said.

"Four universities have budgeted for a deficit, two are budgeting for a break-even result, and two are expecting to produce a surplus."

Universities provided the same forecasts to RNZ in July.

The report cast doubt on the sector's expectations of a $44m surplus in 2025, increasing to $129m in 2026.

"This is predicated on increases to both domestic and international enrolments while expenditure growth is constrained. This will be a difficult equation to manage, with individual performance expectations varying over this period. There remains a considerable number of profitability challenges for the sector - particularly for Massey University."

The report said universities' expenses were expected to rise more than their income.

It said universities were deferring capital spending, but some of the projects were needed.

"For several universities (e.g. Massey, [Victoria University of Wellington], Waikato and Otago), we are concerned that they do not have the base level of performance required to deliver their capital programmes, especially given ongoing construction price inflation. There is a risk that the backlog of deferred maintenance and upgrades mean some universities will not be able to use certain assets (e.g. due to seismic or compliance issues) and/or they are unable to offer facilities that meet students' needs (or that are comparable to other universities)."

The warnings come as the government faces significant costs related to its dissolution of mega-institute Te Pūkenga and reform of polytechnics and industry training, and amid an independent review of universities due for completion early next year.

The report said Massey and Victoria were regarded as high risk, while Otago, Lincoln and Waikato were medium risk.

"We do not consider there are immediate risks to the financial viability of any university. However, there are medium-term risks to the financial position of several universities, some of which need consideration now. This is particularly the case for Massey and VUW. These risks include not only financial risks to the Crown but also lost opportunities in how the university sector can deliver better outcomes for New Zealand," the report said.

Vic and Massey respond

The leaders of Massey and Victoria universities, both classed as high risk, told RNZ their institutions were not in financial danger and were on track to financial sustainability.

The Tertiary Education Commission's report said Massey was expecting a $30m deficit this year. Its domestic enrolments, which had been trending down for 10 years, were now 21 percent lower than in 2021, when domestic enrolments jumped at most universities, and nearly five percent lower than in 2023.

Victoria had 17 percent fewer domestic enrolments than in 2021 and had budgeted for a break-even result this year, the report said.

"However, medium-term sustainability remains at risk.... unless underlying performance improves, there remains a risk that its current borrowing consent limits are breached in coming years. Overall, VUW has major capital plans that are unaffordable and, at present, are simply being deferred which creates future risk.

"There is limited room for VUW to manage further negative shocks or poor investment decisions. Further changes will be necessary in 2024 and beyond to ensure medium-term sustainability."

The report said Massey's campus-based enrolments had dropped 14 percent with distance enrolments up three percent. Its Albany campus had 40 percent of the domestic EFTS it had in 2018 and commencing domestics were down 16 percent.

"There remains an urgent need for Massey to identify and understand why domestic enrolments continue to fall and why other universities are growing at their expense. Until this is understood, and strategies put in place to stabilise domestic enrolments, Massey's medium-term sustainability will be at risk," the report said.

Massey vice-chancellor Jan Thomas confirmed domestic enrolments had fallen, but said some of the decline was expected as a result of the university axing courses such as engineering and reducing duplication of courses across its three campuses.

Many of its older students, particularly in distance education, were studying fewer courses, which depressed net enrolment figures, and it was facing more competition for distance education from other universities, she said.

Massey expected its deficit this year would be significantly smaller than the $30m it originally budgeted and it could reach break-even next year - one year earlier than expected.

"We anticipated a break-even in 2026, but I think we'll be knocking at the door of that in 2025. So it's all going very well, it's all quite planned and we are essentially going through this multi-year transformation with all the pain that goes with that so that we can be really a university that's shaped and operating for our future."

Thomas was not expecting the government's review of universities to result in a more money for the sector and Massey was changing its operating model so it was less dependent on government funding.

"I think it's pretty clear that the sector has been chronically underfunded, but I also think the signals are that there will be no more money for universities and so that calls us in management positions at universities to look at other ways that we can generate income," she said.

The commission's high-risk rating for Massey was based on past performance and Thomas said she was confident it was improving.

"The trigger for that risk rating is three years of deficit, which is absolutely accurate, so there's nothing inaccurate about that risk profile. But we also have a plan for both immediate financial recovery and the longer term shape of the university so that we have an operating model that's suitable for, basically, our new world. We don't have any debt and we have a very strong balance sheet, which we are now starting to activate to drive alternate income for the university," she said.

Victoria University vice-chancellor Nic Smith told RNZ he did not agree that his university was high-risk.

The commission's assessment was based on data from late 2023, and this year enrolments had increased, he said.

Recent enrolment drops were due in part to problems with a new enrolment system and to changing student preferences, with Victoria shrinking while Canterbury grew, he said.

"There's no question that we are now gaining students and gaining market share."

The university had 14,390 students, 218 more than the same time in 2023 thanks to a slight increase in domestic enrolments and an increase in foreign student numbers.

Smith said government funding and student fees had not kept up with inflation and making a surplus had become increasingly difficult. The return of international students would help, but it was not a long-term solution.

"I don't think it's a good long-term strategy. Covid showed that and it wouldn't surprise me if we see another shock again in the medium term in that space."

The government was unlikely to increase university funding significantly so the sector needed to find ways of sharing resources, he said.

"We're too small to not be thinking more carefully about how we share, not just expensive infrastructure in ways that deliver for the country as a whole, but also the intellectual capital that is in institutions."

The university had no further changes planned this year, Smith said. Victoria had halted several capital spending plans, but he did not agree with TEC's warning that it was creating risk by delaying important projects.