As the good times rolled, a quarter of universities ended up in the red

One in four UK universities were operating with recurring deficits before the financial crisis, at a time when their income from most sources was increasing, a report reveals.

In the period 2005-08, variable tuition fees were introduced, student numbers - including from overseas - grew, and investment returns and research income rose.

"However, even during this boom time, 41 higher education institutions - approximately 25 per cent of the sector - generated cumulative aggregate operating deficits," says financial services firm PricewaterhouseCoopers (PwC) in a report, Weathering the storm: Coping with financial challenge in the higher education sector.

It continues: "A track record of recurring and significant operating deficits in such a favourable financial climate has to raise questions around how some of these institutions will cope in more austere funding conditions.

"The challenges that lie ahead for the sector as a whole from increasingly tight fiscal constraints may be more significant for those close to or below the break-even point."

The report raises questions about whether the Higher Education Funding Council for England was keeping a sufficiently close eye on universities' financial management during the "boom years".

Some, such as the universities of Cumbria and Gloucestershire, are receiving financial assistance and administrative support from Hefce because they are struggling to cope with large deficits that were apparent even before the funding cuts announced last year.

Commenting on the PwC report, Anna Fazackerley, head of education at the think-tank Policy Exchange, said: "Given the dark days looming ahead, it is incredibly worrying that such a large proportion of universities have been racking up big recurring deficits in the good times.

"Although it is important for universities to remain autonomous, the funding council should surely be offering stern advice in such situations."

She added that she welcomed the recent move by Hefce to audit universities more intensively.

"The system of five-yearly, one-day checks for most institutions was far too casual," she said.

A spokesman for Hefce said: "For 2007-08, the overall financial results show a positive and financially sound position for the sector as a whole, with an operating surplus (before any exceptional items) of £390 million - proportionally the largest surplus since 2003-04."

The sector also had strong cash balances and healthy reserves, he said.

He added that operating deficits were not always a problem.

"In some cases they may be planned, for example during restructuring or major capital development," he said.

"However, where deficits are carried over several years, they are clearly a cause for concern."

He added: "We will engage with those institutions through our normal dialogue and monitoring processes."

melanie.newman@tsleducation.com.