UTAS:Things must be bad -- Part 2

 

Tasmanian Labor continues to berate anyone not supporting the disposal by UTAS of its Sandy Bay land for residential housing. Liberals, Lambies and Greens are all portrayed as being disinterested in solving the housing crisis by building 2,000+ new homes and/or helping to fund a new STEM building.

UTAS’ surrogate spokesperson Dean Winter has been instagramming images of the proposed development taken from Deloitte’s two reports into the feasibility of the development of Sandy Bay dated November 2021 and March 2022. It’s reasonable therefore to conclude the development plan Dean has been spruiking is the same as described in those Deloitte reports.

In summary this is what we learnt from the Deloitte Reports:

·        The planned development is a 30-year project, mostly for 2,656 new residences, a combination of 1, 2 and 3 bedroom units with an average area of 88 square metres to be sold at an average price of $880,000 (2021 prices).

·        The project will be conducted in stages. Needless to say, outlays will occur before revenue so funds will be required to fund the deficits in the early years. Peak project debt of $234 million will occur in year 5, in 2027, but the project is already 2 years behind schedule. The funds squirrelled away by UTAS to fund the project’s debt have all but disappeared, due to cost overruns and delays with the Hobart rebuilding and the increasing losses from core activities of teaching and research which UTAS is yet to fix. UTAS can’t borrow more without the Treasurer’s permission.

·        The project will reach cash break even in Year 17, after which time the project will start to rebuild UTAS’ equity. Over the ensuing 13 years cash profits of $800 million are predicted. That’s $800 million in future $s, which roughly translates to possibly $400 million in current $ terms. Not a great deal seeing UTAS’s current equity stands at $1,341 million.

·        UTAS initially hoped to run the project itself but due to its deteriorating financial position is now looking at ways to take on a joint venture JV partner and/or selling properties on a leasehold rather than freehold basis. The latter may result from restrictions that may be placed on UTAS by the recently tabled Bill in State parliament.

·        The Deloitte Reports stress that the project is currently only at the 5% design concept stage. To listen to politicians spruiking the deal one could easily start believing they’re ready to turn the first sod.

·        The project doesn’t even manage to meet the minimum target return if land and buildings to be redeveloped are given a zero value. For the project to achieve the target rate of return UTAS will have to pay the developer to take the land off its hands. This won’t occur of course, but what it means is that UTAS will have to accept a lower rate of return if a JV partner wishes to achieve a target rate.

·        If the project proceeds and the project land is given a value whatever that may be, whether it’s zero or $26 million, it will likely be far less than the current book value of the land and buildings. In which case UTAS will suffer a large drop in its equity position, which won’t start to be recovered until Year 17. Sceptics of the redevelopment have been labelled reckless if they don’t sign up as UTAS cheerleaders. It’s much easier to establish recklessness where existing assets are trashed in the hope of getting some back 17 years later. Its craziness on steroids.

·        Given that any surplus cash from the development won’t occur until at least year 17, that’s 2042 at the earliest, the redevelopment proposal has nothing whatsoever to do with funding a new STEM building. For the Labor Party to suggest otherwise reveals a wilful ignorance of reality.

·        Given that the existing land and buildings obviously have a value as part of a continuing institution for learning and research, it is that value that needs to be plugged into any model when trying to assess a rate of return on a project to convert a valuable asset to an above ground cemetery for cashed up baby boomers. It will certainly paint a different picture than the misinformed messaging from the Labor Party.

 

UTAS: Things must be bad when Labor is asked to assist

 

One has to overlook lots of evidence on the public record to pretend as the Labor Party has that UTAS can be trusted to embark on the largest housing development in Tasmania’s history just so it might be able to fund a new $500 million STEM facility in Hobart City.

A memory refresh is needed.

UTAS, like a lot of universities, has accumulated lots of assets over the years thanks to land gifts, land revaluations, bequests and endowments, and capital grants for building.

Historically any losses from core operations of teaching and research were covered by income from investments mostly bequests and endowments entrusted to UTAS to be spent as per the wishes of the donors.

Universities are mostly publicly owned and have had the freedom to operate without restrictions that are normally applied to public bodies, like say, reporting and being answerable to Parliament.

The one restriction that was imposed on UTAS was via Section 7(2) of its governing Act which required the permission of the State Treasurer if it wished to borrow money. Ivory tower academics who used to run universities were presumably thought to need a fail-safe mechanism.

Paradoxically the fail-safe mechanism failed when it was most needed. 

UTAS sells hotels?

 

UTAS may have sold the Mid City Hotel to the Singaporean owned Fragrance Group and the Fountainside Hotel to the State government for housing if the grapevine is correct. The sale prices aren’t known at this stage.

If true it will be a deft way for the government to inject funds into UTAS without poor old UTAS having to come begging to the government to allow it to borrow more.
Not that lenders are queuing at the door given UTAS can’t service existing borrowings from its core operations.

UTAS' deception.

 

The ructions at UTAS continue unabated.

The release of UTAS’s 2023 Annual Report was accompanied by an email to colleagues, presumably staff, from the Deputy Vice Chancellor (Student Services and Operations) explaining what the report meant, together with assurances that management are attending to addressing problems confronting UTAS.

A copy of the email is reproduced below.

Staff members are part of the university as defined by Section 5(1) of UTAS’ governing Act. For an outsider it was jaw dropping to see the tenor of the email to members of the university, replete with misleading statements, half truths and unsubstantiated assertions when commenting on the 2023 financials. It is little wonder relations with staff are strained particularly COBE staff who must have a better grasp of financial matters than the Deputy Vice Chancellor obviously assumes others must have.

Quite incredibly there was no mention of how the Hobart rebuild was impacting UTAS’s finances.

There are four paragraphs where the financial performance of UTAS was discussed where the writer obviously didn’t understand UTAS’ financial statements and/or was quite happy to provide a misleading interpretation.

Comments plus suggested amendments for the four paragraphs plus the introductory paragraph are set out below should the Deputy Vice Chancellor wish to issue an amended circular in the interest of truth and full transparency amongst colleagues and members of the university.

UTAS: The Rufus years

 

Summary:

The first five years of Prof Black’s tenure has delivered $117 million in losses from the core activities of teaching and research including the relentless pattern of restructuring costs as UTAS struggles with declining real revenues and increasing costs. Capital grants of $227 million included as revenue help hide the losses.

Declining cash flows have accompanied the reduced profits to such an extent that 2023 saw UTAS with negative cash earnings for the first time in 2023, with no discernible plan to rectify the mess.

This means operations are unable to service the current level of borrowings.  Servicing existing borrowings as well as all new capex requires running down existing cash and investments until there’s no option but to start selling the family jewels, parts of the Sandy Bay campus.

At the rate of capex spending undertaken in 2023, UTAS only has another two years before the cash tin runs dry, which will not be enough time to make core activities sustainable once again.

The primary focus should be on arresting the decline in earnings from core operations. Moving to Hobart will only defer and exacerbate the problem. Building STEM facilities with a sale and leaseback arrangement won’t fix negative earnings from the core activities of teaching and research.It’ll make it worse as any investor/lessor will want a rate of return well in excess of the rate at which UTAS could borrow, if only Treasurer Ferguson will approve an increase in UTAS’ borrowing limit. UTAS knows this but sheer bloody mindedness has led it to deliberately pursue the reckless course of taking UTAS to the brink of insolvency, by trying to force the hand of the Parliament and the government to allow it to sell parts of Sandy Bay so that it can continue with its vanity project whilst ignoring the wishes of most other stakeholders.

Prof Black has recently railed against the inadequacies of Tasmanian schools’ performances notably the numbers who make it to Year 12. It may be a heart felt concern, but in part is likely to have been a reflection on the lack of students moving on to UTAS. Prof Black called for an inquiry into Tasmania's education system. Any inquiry should require a closer look at UTAS.

However less than expected numbers of Tasmanians wishing to study at UTAS must be in part due to mainland universities being able to attract the best and brightest, those who can afford it and those wishing more face-to-face learning and/or a more communal/collegiate setting than lesser quality offerings in a traffic congested city.

If the edu-migration international student Ponzi scheme was virtually over even before it started, no doubt ably assisted by the Covid virus, how long will the current plan last?

Even the mildly sceptic would question if UTAS racks up $117 million in losses from core activities over five years what are the odds of it pulling off a much riskier project like the Hobart move? If it doesn’t who’ll be left holding the can?

Isn’t it time to take a deep breath.

The government and the Parliament need to show who’s boss. Prof Black or the people of Tasmania?

What the 2023 Annual report revealed:

The 2023 year was by far the worst of the five years since Professor Black assumed the role of Vice Chancellor of UTAS.

STT's desecration continues

 

The desecration continues. Another 20 hectares, this time in the iconic Dial Range on Tasmania’s Central Coast has been earmarked for clear-felling by Sustainable Timber Tasmania STT later this year.

Tasmania's debt: Should we worry?

 

Viewing problems facing State governments through the same lens used to look at Federal budgets run the very real risk of erroneous conclusions.

The Australia Institute wrote an opinion piece titled Tasmania's fear of Government debt is hurting the State published in The Mercury on 22^nd March reassuring Tasmanians that deficit spending was fine because our assets are growing. “That does not sound like a government about to go broke“, it was said, ignoring the fact  insolvency isn’t triggered by a lack of assets, rather an inability to service liabilities.

There followed an assertion because our per capita net debt was lower than other States, despite other financial liabilities such as the much larger unfunded defined benefit scheme for government employees, Tasmania was sitting pretty. Our biggest challenge is to unshackle ourselves from a restrictive self-imposed borrowing constraint.

The pro-forma response to the Tony Abbott-Joe Hockey debt and deficit doomsday scenario was trotted out. Most economists agree with this knowing the Australian government is not revenue constrained and more significantly, controls its own currency, neither of which are true in the case of state governments.

The weeties choking moment came when it was stated: “Tasmania currently is able to meet its spending commitment to pay teachers, nurses and other public sector workers. The “cash flow” of the government is actually in surplus “.

That statement shows a complete misunderstanding of Tasmanian government financials. The suggestion that operating revenue is enough to cover operating spending is simply wrong.

This blog will pinpoint the errors whilst also having a look at the way State governments report their budget outcomes compared to the way the Federal government does.

Election 2024: Tas vs Vic - the battle for the Basket

 

Our less than honest politicians continue to rely on an endemic misunderstanding of State government debt when spruiking their credentials as economic managers.

Rebecca White harks back to 2014 when general government net debt was absent. But there was plenty of unfunded superannuation liabilities and borrowings by government businesses, some of which were needed to pay returns to government, that she conveniently sidestepped.

Jeremy Rockliff’s advertisements have a fleeting glimpse of a chart showing net debt across states with Tasmania having a small amount compared to other States. A disingenuous comparison given we’re the smallest State.

Treasurer Ferguson when defending the level of debt in his 2023/24 Budget the day after the budget was handed down in May 2023 told us our net debt is quite low:

 “…our borrowings are very, very small in comparison to other jurisdictions per capita, just have a look across the waters that Victoria what they are doing……..I wouldn’t want to be in their shoes.”

There’s plenty of metrics to suggest our predicament is not much different to Victoria, perhaps even worse given we are still deluding ourselves about our true position, and about to be lumbered with another round of unfunded election promises no matter who wins.

Election 2024: The Labor Fiscal strategy

 

Just when one thinks things can’t get any worse the Tasmanian Labor Party put out its Fiscal Strategy Statement with an accompanying media release declaring Treasurer Ferguson “simply has no idea what he’s doing.”

It’s a classic case of a kettle being called black by a particularly sooty pot.

The Fiscal Strategy is a statutory requirement of the Charter of Budget Responsibility Act 2007. Opposition parties need to lodge a Strategy with the Treasury Secretary ten days after an election is called.

The Tasmanian Labor Party outsourced the preparation of its fiscal strategy to its media minders. As a consequence, the strategy is a flawed document replete with dubious and at times incorrect assertions.

Election 2024: End of the UTAS dream?

 

Reading between the lines of the Liberals’ statement vowing to block the sale of UTAS’ Sandy Bay properties, one gets the feeling it’s a PR masterstroke from UTAS. They’ll now be able to say they were forced to change course rather than having to admit it was a crock of an idea in the first place.

Election 2024: UTAS issues

 

The Clark electorate in Hobart is particularly crucial. If major parties only manage to get two seats each at the State election on March 23rd they will need four seats in the other four electorate to achieve a majority in the new parliament. That’ll be a tough ask.

Given the poll 18 months ago revealing three quarters of Hobart City electors are opposed to UTAS’ move into the City it is a little surprising there hasn’t been a greater willingness by third parties and potentially key independents vying for the three remaining seats to discuss their views with voters.

Election 2024: The debt balloon ahead

 

In the previous four blogs we looked at the fiscal landscape confronting Tasmania and the major flows in the current government’s budgets  - revenue, operating expenses and debt servicing costs. This blog will try to reconcile these flows with the increasing levels of borrowings that awaits any future government.

Election 2024: Revenue

 

This blog tales a closer look a government revenue particularly the vexed question of our own source revenue.

The 2023/24 Revised Estimates Report presented revenues for the Budget year 2023/24 plus the three years of forward estimates:

 

 

Revenue doesn’t change much, from $8.5 billion this year 2023/24 to $8.9 billion 3 years later.

In real terms revenue is static. As we saw in the fiscal sustainability blog, revenue is failing to keep up with outlays.

The fall in returns from government businesses (dividends, tax and rate equivalents) is because the special dividend from Tascorp representing the annual drawdown of the $730 million of Mersey Hospital money received in 2017 intended to last 10 years will fall a little short in the tenth year. Roughly $100 million per year has been/will be drawn down in the first nine years. Only $27 million will be left for year 10 in 2026/27. The new government will have to work out how the revenue shortfall will be fixed in future years.

At least the no- worse off GST guarantee which was due to expire in 2026/27 has been extended for another 3 years. The Albanese government wasn’t prepared to get off-side with WA voters by trying to revise GST arrangements which handed a massive boost to WA in the Morrison years and decided instead to kick the can down the road for another 3 years by giving other States an extended no-worse off guarantee.

But slowing population growth in Tasmania relative to Australia as a whole will tend to reduce our share of the GST pool over time. Which will be a problem going forward especially as any extra GST already received as a result of population share increases, had zero effect on addressing the needs of the additional population. The gap between the demand and supply of all services has continued to grow.

Now to have a closer look at own source revenue. The grants in the above table include all grants from the Feds, the general-purpose grants (GST share) plus all the specific purpose grants split comprising both capital and operating grants. The balance of revenue is own-source revenue, all reasonably self-explanatory.

One of the current government’s fiscal targets is for not less than 37 per cent of government expenditure be funded by own-source revenue. Proposed expenditure figures from the RER plus revenue as per the above table split between grants and own source revenue, enables us to check the percentage figure in each year. This is shown below:

	23/24	24/15	25/26	26/27
Grants	5,535	5,698	5,656	5,845
Own source revenue	2,958	3,020	3,082	3,090
Total revenue as per RER	8,493	8,717	8,739	8,935
Expenses as per RER	9,014	9,009	8,877	8,987
Own source revenue as % expenses	32.8%	33.5%	34.7%	34.4%

 

At first glance it looks as if some progress is being made. But there are a few important caveats:

·        In real terms there is no increase in revenue.

·        A replacement for Mersey money is yet to be found.

·        Much of the improved % is due to a fall in expenses.

As noted in the blog on spending plans, future expenses assume $300 million of Budget Efficiency Dividends are found. Even if some are eventually discovered the likely additional outlays required to meet election promises will likely swamp any savings very quickly.

With zero real growth in revenues the reason for the downward slide in real operating outlays before debt servicing costs is glaringly apparent.  

Paying for infrastructure and debt servicing costs whilst trying to slow down the inevitable increases in borrowings, leaves no alternative but austerity implied by the RER. The gap between necessary services and what will be delivered will only widen. It’s difficult to draw any other conclusion.

The next blog will draw together some loose ends and try to reconcile the expected flows (spending, debt servicing and revenue) with our increasing stock of debt.

 

 

Election 2024: Debt servicing

 

This blog takes a closer look at debt servicing costs which increasingly is becoming a crucial matter for service delivering government(s) afraid to raise more revenue lest voters shy away.

Election 2024: Spending plans

 

This blog will take a closer look at expenses in the government’s budget as updated in the 2023/24 Revised Estimates Report (RER) issued 15^th February 2024.

Election 2024 : Budget sustainability

With five weeks of election campaigning to spread the message, this blog site will assist by posting regular vignettes looking at problems ahead and drilling down into some of the claims made by politicians vying for our vote.