Paper gains on investments and property deals saved New Zealand¡¯s universities from their first sector-wide deficit last year, but their luck has now run out, according to the Tertiary Education Commission (TEC).

A confidential March briefing says the sector¡¯s then unaudited NZ$138 million (?65 million) surprise surplus masked a considerable shortfall in ¡°performance from core operations¡±.

Putting aside one-off gains and a NZ$115 million improvement in ¡°net trust income¡± ¨C mostly unrealised gains on investment portfolios ¨C the sector registered a NZ$66 million deficit.

¡°This¡­is notably worse than the NZ$5 million underlying deficit that had been budgeted,¡± the TEC told tertiary education minister Penny Simmonds. ¡°We do not consider there are immediate risks to the financial viability of any university [but] medium-term risks to¡­several universities¡­need consideration now.¡±

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The partially redacted memo was released to media following a??request under the Official Information Act. The contents underline fears that years of sub-inflation funding increases, soaring costs and declining enrolments have left universities financially vulnerable.

In a briefing to Ms Simmonds shortly after last October¡¯s election, the TEC warned that the sector had?forecasted collective deficits?in 2023 and 2024 ¡°for the first time on record¡±.

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Audited 2023 financial accounts subsequently published by all eight institutions presented a more positive picture, with the sector registering an overall NZ$113 million surplus. But this was entirely due to an ¡°exceedingly strong¡± result from the University of Auckland, which finished the year NZ$152 million ahead.

The memo notes that domestic and international enrolments are tracking above expectations this year, but the increase is uneven, maintaining a recent pattern of ¡°changes in market share¡±. Most affected is Massey University, where domestic student load declined by 21 per cent between 2019 and 2023 and new student numbers are down 16 per cent this year.

¡°Further declines are likely in coming years due to the negative pipeline effects. Massey [needs] to identify¡­why domestic enrolments continue to fall and other universities are growing at their expense.¡±

Massey said it was ¡°working to address the TEC¡¯s concerns. We are focused on increasing our domestic enrolments, particularly on-campus learners, and to ensuring that our academic offer is attractive, relevant and sustainable. This is part of the university¡¯s plan to return to a surplus position by 2026.¡±

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The memo says the TEC rates two universities ¨C including Massey ¨C as high risk and three others as medium risk. It questions institutional predictions of future surpluses, noting ¡°optimism bias¡± in enrolment forecasts and underestimates of inflation.

The sector has budgeted for a NZ$42 million deficit this year, it says. And while surpluses of NZ$44 million and NZ$129 million have been forecasted over the next two years, they are ¡°predicated¡± on assumptions of increased enrolments and constrained spending.

¡°This will be a difficult equation to manage,¡± the memo says. Expenses increased by 50 per cent more than expected in 2023, the memo notes, while an anticipated 1 per cent increase in domestic enrolments turned into a 3.5 per cent decline.

Tuition subsidy rates and fee increases fell by 13 per cent in real terms between 2019 and 2023, the memo observes. A 9 per cent funding rate boost last year ¡°will close some of the gap¡±, but it included a?4 per cent increase?that expires next year. ¡°This decline is not currently assumed in university forecasts.¡±

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john.ross@timeshighereducation.com