Universities, Staff, and Buildings

Sam Marsh sent me this video in reply to my previous post on UCU’s claims about capital expenditure. It’s meant to explain how it is the case that universities can afford a large pay rise for permanent staff (without leaving less for de-casualising staff, closing the pay gap, etc.):

The argument is that since universities manage to spend a great deal on building, they can afford to spend more on staff instead.

I don’t know much about university budgets, but I found many of Sam’s claims to be quite confusing from an accounting point of view.

At around 14:10, he says that if a university buys a building, that expenditure won’t show up on its annual report. My understanding is that if an expenditure isn’t capitalised it will show up on an income statement. You avoid this by depreciating the cost over several years.

Between 15:05 and 15:40 he explains depreciation as money that a university accumulates in order to be able to rebuild a building if it falls down — an ‘insurance policy’. This is not my understanding of depreciation. It makes it sound as if depreciation is money ‘set aside’ from the annual cash revenue of a university, which could have been paid to staff instead.

In fact, depreciation isn’t taken from annual cash revenue. Nor is it an amount of money ‘set aside’ to finance the replacement of a building that falls over. This was explained by Amanda Williams, a Senior Lecturer in Accounting at the University of East Anglia:

A useful explanation of depreciation is found here. It means capitalised expenditure that is accounted for over a long period. You take the difference between the original cost of the building (say) and its scrap value, and you account for a bit of it each year, over 20–50 years.

There are lots of reasons to depreciate. Tax purposes, for one. But also it allows you to post net income each year, so long as the capital investment generates a return. In effect, the building is being accounted as gradually paying for itself, out of the return it generates. It doesn’t take money from anywhere else in the budget; rather, it ‘gives’ money to the budget.

This assumes the building investment has positive ‘net present value’. But to get the investment project approved, you’d have to make a reasonable case for it having positive NPV (as Amanda Williams points out in the tweet above). There is evidence that university capital expenditure in general has quite high NPV.

Starting around 18.50, Sam suggests that if you subtract depreciation from expenditure, you’re left with a lot of spare income:

This matches the fall in the percentage of income allocated to staffing costs:

We’re meant to conclude that if the investments hadn’t been made, the income could have gone to staff.

This argument depends on the incorrect idea that depreciation is cash set aside to fund the replacement of a building. In fact, depreciation is simply an amount the accountants deduct from the return on the investment, to cover the original expenditure (which wasn’t accounted for when it was made).

Therefore it makes no sense to remove depreciation from income and leave income as it was. You have to remove the returns from which the depreciation was deducted. Given that the investments had positive NPV (otherwise the university would have fallen towards insolvency), the returns subtracted from income would be greater than the depreciation subtracted from expenditure.

In other words, you’d have to drop the top line here below the bottom one on this graph:

The result would be that staff costs as a percentage of total income (or expenditure) would be higher. But the absolute amount would be the same. It would just be that return-generating investments weren’t made, so total income would be lower.

Now, universities that are highly geared need to collect big cash reserves. And that means diverting real cashflow away from staff. So I’m not saying that there isn’t a connection between borrowing to finance investment and reduced expenditure on staff. But that’s not about depreciation.

Universities have basically been forced to gear up by cuts to capital grants. HEFCE capital grants to universities were cut by over 70% between 2010–12. That’s when we see staff costs as a percentage of expenditure really starting to drop significantly (the recession of 2008 also takes its toll):

But we can’t calculate how much *spare* income universities would have had to spend on staff by subtracting depreciation from expenditure. On the contrary, so long as NPV>0, removing investment would bring income down more than it brought expenditure down.

To say otherwise is another false abundance narrative. The function of these narratives is to allow UCU to avoid having to answer the question of which it prioritises out of: (1) a pay increase for all permanent staff, (2) the creation of new permanent contracts for casualised staff, and (3) the targeted uplift of staff disadvantaged by the pay gap. I wonder why they don’t want to answer that.