Thousands of non-teaching staff in public universities will be laid off to ease the institutions' financial burden.
The National Treasury said other measures to be taken include writing off accrued tax on statutory deductions that have not been remitted by universities.
The Treasury said the universities should sell idle assets, including land and buildings, to generate funds to pay pension schemes and other creditors.
It emerged that the total amount of public universities' debt by September 2020 is about Sh37.3 billion, most of which is owed to the Kenya Revenue Authority (KRA).
Other debts include unremitted insurance premiums, sacco contributions, statutory deductions due to both the National Hospital Insurance Fund and National Social Security Fund.
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The chairman of Vice Chancellors of Public Universities Prof Geoffrey Muluvi said a special fund should be set up to bail out public universities.
But the National Treasury Principal Secretary Julius Muia said universities should first trim the bloated workforce inherited from constituent colleges and dispose off iddle assets.
“The teaching to non-teaching ration in some of these universities is as high as 1:4,” Muia told the parliamentary committee on education.
To this end, it emerged that Egerton University has already requested for funding for retrenchment, while other universities have been told to come up with ways to downsize their staff.
The PS said most universities inherited staff from technical and teaching training colleges who did not meet the minimum teaching requirement yet they are still on their payrolls.
Going forward, Muia called for a framework that restricts future employment in public universities subject to approval and confirmation of funding by the National Treasury.
“The financial implication of the rationalisation will then be considered for implementation subject to resource availability,” said Muia in a presentation to MPs.
On the non-remittance of PAYE, the Treasury PS told the MPs that funds should be provided for universities to pay KRA .
“The other option would be to write-off the tax universities owe as at June 30, 2020,” he said.
Meanwhile, Education PS Simon Nabukwesi said the university budget over the years been affected by implementation of Collective Bargain Agreements (CBA).
He said in the 2019/20 financial year, universities’ approved budget was Sh43.756 billion and the CBAs signed between universities and workers unions gobbled Sh6.6 billion.
“After the payment of the 2010-2013 CBA amounting to Sh7.8 billion, the public universities determined that they still require a total of Sh1.3 billion to settle the pension component of the CBA,” said Mr Nabukwesi.
For the 2013-2017 CBA, the amount disbursed to the universities totaled Sh10 billion but the pension component totaling 1.8 billion was not factored in the allocation.
Prof Muluvi said the CBAs are under-funded, adding that the pension component for the 2010-2013 CBA amounting to Sh1.3 billion has not been settled.
"The pension component for 2013-2017 amounting to Sh1.8 billion is yet to be settled. The ministry has so far only provided universities with Sh6.6 billion to implement the CBA so as to pay the arrears for the period from July 1, 2017, up to June, 2020," said Prof Muluvi.
He said for the financial year 2020/21, universities are yet to receive a balance of Sh2.2 billion that is required to implement the new salaries going forward.
"Universities have accrued unremitting statutory payments to KRA, pension scheme dues, insurance premiums, Sacco contributions, NHIF and NSSF. The total amount owned by September 2020 is about Sh37.3 billion, most of which is to KRA," he said.