Frequently Asked Questions and Answers
These issues were raised by the Heads of School and Heads of Department as well as Directors and Administrative Managers during Financial Management within Monash Training courses conducted in August through October 2007. They form the basis of the following “frequently asked questions”:
Monash’s Overall Financial Situation
If the University could not pay its bills, could it be put into administration?
- Technically it is possible; however given that the University was set up by an Act of Parliament, then it is likely that the Government would intervene if Monash was in financial difficulties.
Why worry re debt when we can borrow at 6.51% and achieve a return on investments of 16.5%?
- It is true that Monash has managed to achieve an excellent return on its Investments (Monash University Foundation) in the last 3 years. The investment portfolio is managed by commercial investment managers under contract and supervised by the Treasurer. However there is obviously no guarantee that this return will continue to be achieved. The risk profile of the investment strategy is conservative.
- If Monash were to liquidate its investments, it could currently repay its debt.
- Monash cannot borrow to invest and under Monash Directions 2025 wishes to become financially self reliant – reducing its reliance on debt. The financial strategy is to cap borrowings at around $315m and not to further increase debt from 2009 onwards.
- It also needs to continue to comply with the benchmarks set by the Government.
Is it true that loans are not secured against assets?
Is interest on University loans fixed or variable? If our operating margins drop, will Monash pay higher interest rates on its loans?
- No. In all cases the interest rates have been negotiated on a "fixed" basis, i.e. they are locked in for specified terms, generally to the final maturity date of the loan facility. No matter what happens with interest rates in the market, the rates on our facilities are fixed, in some cases for terms of up to 20 years. Obviously though, as new borrowings are undertaken, the interest rate applicable to those borrowings have to be negotiated in light of the market interest rates applicable at that time.
- It is worthwhile mentioning that at present (Oct 2007) our weighted average interest rate for all facilities, including margins payable, is approximately 6.25%, with the weighted average term to maturity of all facilities in excess of 8 years.
- All the loans are flexible in that they can be repaid before maturity without incurring penalties.
What is the current interest cover?
What is the history of the Monash debt – when did Monash commence its debt program, and what was it originally for? How and why has it grown?
- Monash borrowings go back at least 14 years although they were relatively modest in the early years. The major part of the borrowings have come over the past few years with the following new borrowings undertaken:
- 2006/07 $30,000,000
- 2005/06 $67,100,000
- 2004/05 $15,000,000
- 2003/04 $25,000,000
- 2002/03 $41,300,000
- In nearly all cases the borrowings have been used to support the capital works program of the University, although a borrowing of $32M was undertaken to fund the purchase and installation of the SAP and Callista system. No borrowings are used to fund the day-to-day requirements of the University.
What is meant in the financial strategy presentation by non core activities?
- These are grants received and extra gains and losses on disposals. The non core activities distort the results since the Government insists that Universities currently recognise all Government grants, whether for revenue/operational items or capital through the Profit and Loss Account in the year that it is received. This is not in line with normally accepted accounting principles, which follow the matching principle, with revenue for capital items being taken straight to the Balance Sheet. Any capital grants therefore inflate revenue numbers in the year of receipt and it may be many years before the expense is recognised via the Profit and Loss Account through depreciation.
- It is therefore important that the core activities achieve the required margin each year rather than relying on this variable and discretionary revenue.
Can the University issue shares?
- Not under its current constitution.
Can funds from the Commonwealth Endowment Fund be applied to developments such as the STRIP?
- Although the details have not been announced by the Government, it is intended for infrastructure projects. There is some debate about whether this needs to be new infrastructure.
- It is unlikely that the STRIP would be eligible, given that it has already received around $50m in State and Commonwealth Government funding.
What is the thinking behind encouraging over enrolments and what is the financial impact of over enrolments? Are they across the board or degree specific?
- All universities currently have a contract with the Government for the profile of students they enrol.
- The current system is that if Monash achieves the agreed number of student enrolment set for the year, then Monash will receive the funding that goes with those students. However if they manage to attract extra students, then the Government may contribute up to a maximum of 1%, for these additional students.
- Monash has done well in the past in meeting its targets.
- In the 2007 Budget the Government announced that for 2008 it would fully fund over enrolments up to 5% - with each 1% of over enrolment representing around $3M to Monash. Whilst some faculties are restricted and others have low demand, Monash plans to take advantage of this opportunity. The overall target needs to be met before any over enrolment is considered.
How much was raised by fundraising last year and what are the targets for 2007?
- A paper has recently been produced on this area. It defines what is meant by donations – namely research and non research donations.
- At August 2007, cumulative donations received from Jan 2006 were $1.9M behind the cumulative target at that stage of $35M. The cumulative target for May 2008 is $90M this will require an exponential growth in donations in the coming months.
Monash Budgeting Process
What can be done to ensure transparency in budgets?
- Budget process detailed on website also handout provided on course.
- More transparency at Faculty level.
Why does budgeting process only look at one year at a time? It is very limiting and stifles strategic planning?
- Budget process does look at rolling 3 year plans.
What is the situation regarding budget carry forwards? Currently there is no incentive to spend less than budget – achieve efficiencies.
- In order to control expenditure in a planned manner, up until now Faculties and Divisions have not been allowed to carry forward any additional revenue earned or costs savings made in one year to the next. The University does not want unplanned expenditure. It is appreciated that in the past this has led to wasted expenditure by the Faculty or Division in order to ensure that their budget is not cut for the next year.
- From the end of 2007, faculties will be provided an incentive on actual results above the budgeted results. This money will be put aside for the Faculty and they will be credited with interest earned on it in 2008. In addition, they can call on these reserves to spend on Strategic Initiatives, other capital expenditure projects etc. with the approval of the Vice Chancellor. This permission is necessary to ensure the overall financial position of the University is considered at the time of the planned expenditure.
- If Faculties do not meet their required operating result target for 2007, this deficit will be carried forward and set against future surpluses. They will not be charged interest.
- For Support Services there is an intention to bring in a similar process but any “reserve” will be at the portfolio level i.e. VP level.
- In terms of incentive to make efficiencies, it will be up to the Faculties and VPs of the Divisional Portfolios to determine what will happen going forward given the proposed changes.
Central Overhead Charge (Strategic Cost Model / Activity Based Costing)
What percentage of revenue is consumed in central support charges? Is it higher than 31.5%?
What benchmarking occurs in respect of central support charges?
- In 2007, the average central cost as a percentage of total faculty revenue is 27.5%. This figure is different for each faculty.
- Impossible to perform exact comparison with old method since the bases are different – e.g. Space was not included previously.
- Some benchmarks are being established such as HR, IT and Facilities management. However, benchmarking has its own problems with proper comparisons of quality and level of service is subjective and difficult to assess.
- Benchmarking across Go8 is sometimes difficult as each university provides services quite differently and are sometimes either centralised or decentralised.
- The Shared Services Project is also looking at further efficiencies.
- Current project looking at Procurement is conservatively estimated to save the University 10% on the $260m it spends each year. Already reduced Telstra bill by 30% and now looking at fleet management.
What is the current situation re Service Level Agreements (SLAs)?
- SLAs were originally drawn up when the Activity based Costing Model was introduced and were agreed by the Faculties at that time. However they vary in the detail to which they describe the services provided and key performance standards. E.g. Some go for 9 pages and others amount to one paragraph.
- Due to the high number of them, they are being reviewed on a 3 year cycle – so all will be reviewed each 3 years but not all at the same time.
Course Costing Model
Has there been any post implementation review based on the course costing model?
- FiRM have not done so. Model sent to Faculty/School and they may have performed a follow up.
On Costs
In the on-cost calculator, there is an apparent anomaly regarding maternity leave – there are two figures – 1.1% and 1.3%. Which is correct?
- Both are correct, the 1.1% is before allowing for an overhead element.
Long Service Provisions - on costs – how is this going to change next year?
- At present Faculties and Divisions recognise LSL as it is incurred when a staff member takes LSL or the full amount on termination. This makes it difficult to budget and prudently manage the accruing costs in the long term.
- From 2008, LSL will be managed centrally, thereby avoiding these unplanned variances from budget at Faculty and Divisional level. 3.3% will be added to On costs and when a staff member takes 3 months LSL, their Faculty or Division will be credited with the entire cost – thereby allowing a replacement to be engaged if required.
- The calculation of 3.3% is based on recent history and if there is surplus at the end of the financial year, it will be credited. Remember that the LSL provision is accrued at the historic salary rate, however the provision has to allow for funding at the current rate.
What is being done in response to the AUQA audit finding re cutting paperwork?
- Peter Marshall is looking at systems to reduce paperwork.
- There is a need to question not only how we do things but also whether they need to be done at all.
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