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Financial position of universities

 

The financial position of Dutch publicly funded universities is stable. This conclusion is drawn by the Education Inspectorate in its Staat van het Onderwijs 2015/2016 (‘2015-2016 State of Education’)¹. Maintaining a sound financial position is not obvious in view of the drop in government funding per student and the increasing uncertainty about future financing, for example.

 

Here, you can read more about the background of the universities' current financial position and the expectations for the future. This sector view is a sum of the 14 individual universities' positions. Keep in mind that the financial position of each university varies according to the specific context of each institution: while one university may already be investing heavily, another might be saving in order to finance future investments.

 

Sector achieves sound financial results
The table below demonstrates that the financial position of the universities is currently sound. Solvency – the ratio of equity to loan capital – remained almost constant at around 49%. The liquidity position of around 1 shows that universities are able to meet their financial obligations even in the short term.

 

Financial position of associated universities

Source: DUO 
 
In addition, the table shows that the universities have jointly achieved a positive operating result in recent years. However, this fact does not mean that the universities are unnecessarily hoarding funds. The Koopmans Commission, set up by the Dutch Ministry of Education, Culture and Science (OCW), concludes that positive results are necessary to maintain buffer capital. There are several reasons for this:

 

1.    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 at the same prices for which they were purchased, 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.

 

2.    Universities require significant equity capital to cover financial risks. A growing proportion of university revenues is variable, which increases uncertainty and risks. You can read more about this topic under the heading ‘Maintaining a solid financial position is not easy’.

 

3.    Universities regularly have to invest large amounts in buildings and laboratories, new and old. They are then faced with a choice: save the money first, or borrow money and pay it back later. If a university 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.

 

Maintaining a solid financial position is not easy
Although the financial position of universities is solid, it weakened in recent years. Figures from Statistics Netherlands (CBS) show that the financial indicators for solvency, liquidity and buffer capital fell the most in the university education (‘wo’) sector between 1998 and 2016.

 

Development of financial indicators per education sector, movement in 2016 compared with 1998

Source: Statistics Netherlands (CBS). Data for the primary education (‘po’) sector is not available for the whole period 1998 to 2016.
 
Universities' solid financial position may be put under pressure by increasing uncertainty about future funding. The vast majority (about 80%) of university expenses, such as personnel costs, housing costs and depreciation costs, are relatively fixed. This fact means that universities will benefit from certainty about long-term income. Since 2011, however, variable components – such as student numbers and diplomas – have played an increasingly important role in the distribution of government funding. Recent measures such as the capping of the doctoral component only reduce the increasing uncertainty to a limited extent. In addition to the great deal of uncertainty about the government’s contribution, universities are increasingly dependent on even more uncertain secondary and tertiary funding (indirect government and contract research funding); in this light, the number of research proposals approved by the Netherlands Organisation for Scientific Research (NWO) and the EU can vary considerably from year to year.
 
This context means that the long-standing uncertainty in 2017 about the award of the study advance and performance agreement funds in 2018 was very difficult for universities. There is also uncertainty for universities each year whether rising student numbers as well as rising wages and prices will be converted into a higher government contribution. As this situation was not always the case in the past, universities cannot count on it in advance. The graph below shows that it is often only in autumn that universities receive any clarity on the adjustments made to the amount that they receive from the government. At that point, it is difficult for universities to spend additional funds in the same calendar year. However, universities are increasingly responding to this development. The operating result was only €62.3 million in 2017, while the government’s adjustment in the same year amounted to almost €175 million.


The declining government contribution per student is also a major threat to the sound financial position of universities. In recent years, the government’s contribution did not keep pace with the enormous growth in the number of students; universities are given much less money per student than 10 or 20 years ago.

 

Future expectations: necessary investments lead to lower operating results
Housing and facilities are crucial for good education and research. There will be no groundbreaking research without a modern laboratory, nor will there be accessible education without sufficient space in lecture halls and study areas. In 1995, housing and facilities were placed under the Dutch universities’ own management. Since then, universities have been responsible for maintenance, renovation and new construction. As a result, each university can decide for itself how best to facilitate education and research. 
 
Housing management also means that universities will have to finance most of the investment themselves. It is cheaper to finance investments with equity than with borrowed capital. In order to ensure that the cost of loans does not come at the expense of resources for education and research, universities choose to finance their investments as much as possible from their own resources and thus save for them first. This choice partly explains the growth in liquid assets at universities on the eve of new investments.

Given that a large part of the university housing and facilities has become outdated, many universities are now or in the near future relying on their financial resources to finance the necessary investments. In addition to refurbishing or replacing buildings, the teaching and research ambitions of the university community call for investment in lecture rooms, study spaces and workplaces. We therefore see in the financial outlook that universities expect liquid assets and operating results to decline in future.

 

Development of universities' financial position, 2017–2021

Source: Consolidated continuity sections for the year 2017 of the 14 VSNU members based on DUO data. Please note: The 2017 consolidated continuity section is not available for Leiden University. For this university, the data from the separate continuity section has therefore been included in the table.


In addition to the necessary investments in university accommodation and facilities, universities have agreed to make additional investments in the quality of education in anticipation of the proceeds from the introduction of the student loan system. This agreement involves investments in the years 2015, 2016 and 2017 of at least €200 million in total. Universities made pre-investments of almost €77 million in 2015 and €105 million in 2016. A further €120 million of pre-investment is budgeted for 2017. An increase in the number of students is expected in the coming years. In order to provide students with high-quality education, additional teachers are needed in the first place, but accommodation may also need to be adapted. Smaller-scale education requires a higher number of small lecture halls and flexible rooms. Investments should also be made in IT facilities that are equipped for forms of learning such as online lectures, flipped classrooms and blended learning.


If you have any questions about the financial position of an individual university, please contact the university in question.
 
[1] Education Inspectorate, De Staat van het Onderwijs 2015/2016 (‘2015-2016 State of Education’) , p. 184.
[2] Buffer capital is calculated as the equity divided by (total income + financial income).
[3] Solvency is calculated as equity divided by total equity.
[4] Liquidity is calculated as current assets divided by short-term loan capital.
[5] Profitability is calculated as the result divided by (total income + financial income).