A Digression on University Finance

Well, you may have caught Alex Usher’s HESA post this week on university finances.  He presented data on university operating budgets from the CAUBO/Statistics Canada financial survey for the period 2007-08 to 2011-12 that shows that university budgets went up by 28 percent.  This is quite intriguing because while universities maintain they have been having a tough time during the recent recession, it would appear that their income is rising twice as fast as inflation.  So, why are universities undergoing program reviews to put themselves on the path to sustainability?

For example, Brock University has recently announced a review of all administrative and academic programs intended to “put Brock on the road to long-term sustainability by ensuring that its programs and services align with its stated mission and strategic priorities while at the same time addressing Brock’s financial condition.”  While on average university income in Canada is rising at twice the rate of inflation, it would appear that Brock has a projected operating deficit despite exponential enrollment growth and program expansion.  Moreover, it is apparently not just Brock.  Guelph and Wilfrid Laurier are undergoing similar reviews.

So if despite rising enrollment and rising revenues, universities are having trouble making ends meet, what could be the source of the problem. Well, university debt levels could be one possibility. It is not just students who have taken on high debt levels to finance their post-secondary education.   Universities in Ontario have also taken on a rather large amount of long-term debt to deal with rising enrolments, infrastructure renewal and program expansion.  Government in Ontario allowed its universities to take on rather large amounts of debt over the last decade as a substitute for more government capital funding or additional fees on students.  And apparently, it is not just an Ontario or Canadian phenomenon as US universities are facing similar issues.  It could be that the costs of carrying this debt are finally coming home to roost.

Is there any evidence from Brock, Wilfrid Laurier or Guelph?  Well, I took a quick look at their financial statements and got some recent numbers on their long-term debt, revenues and debt service costs.  Long-term debt is probably not a complete measure of all their liabilities but it is a good start.  As Figure 1 shows, long-term debt has gone up at all three universities since 2006.  Between 2006 and 2012, long-term debt at Brock grew 78 percent, WLU grew 39 percent and Guelph 29 percent. As of 2012, long-term debt stands at 52.7 million dollars at Brock, 227.4 million at WLU and 196.8 million at Guelph.  Note that in terms of enrollment (headcount), Guelph is the biggest of the threee universities with about 27,000 students while Brock has about 18,000 and Wilfrid Laurier about 17,000.  As of 2012, the long-term debt to revenue ratio was 20 percent at Brock, 28 percent at Guelph and 76 percent at Wilfrid Laurier.  Obviously, if Wilfrid Laurier University was a country, the IMF might have some concerns.  However, the situation seems relatively better at Guelph and Brock. 

 

What is the cost of carrying this debt?  Well, annual interest charges in 2012 were 6.4 million dollars for WLU, 11.4 million for Guelph and 6.2 million dollars for Brock. That is a lot of money.  In the case of Brock, its projected deficit for 2013-14 is 7 million dollars - which is almost what it is paying in interest charges on its long-term debt.  Have universities bitten off more than they can chew when it comes to their debt financed capital projects?  Good question.

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Comments

[Joel W]

I think you have identified the cause. When I was on the Board of Governors at Guelph s a phd student I noticed that the annual interest payments on the debt (from various capital projects) made up most of the university's structural deficit.

The one issue though, is that those capital projects, that were the source of the debt, also increased revenues because they allowed Guelph to take in more students. So it could be possible that in a counterfactual world without capacity expansion they would still be in deficit.

[Fran R Woolley]

Livio - interesting. A couple of other factors
- pension plan deficits due to contribution holidays in the '90s/2000s, low rates of return in last 5 or so years, promises made to people retiring at the top of the (stock) market.
- lingering effects of the big decline in the value of endowments a few years ago, also impacts of lower than anticipated rates of return on existing endowments. This second one is a bigger issue for the endowment heavy universities e.g. Queen's.

Another factor to think about is that these revenue numbers include things for, e.g., medical research, that arguably add a dollar on the cost side for every dollar they contribute on the revenue side.

[Kevin]

Why were there such sharp rises for all three institutions for the year 2012? If you took out this observation the trend would not be as clear. Maybe there is an explanation?

The double cohort was an event that caused a lot of Universities to create more space. Even though it was really only a one year increase in applications the ripple effect lasted for at least a year after. Maybe this sparked an increase in construction (residence, etc.) which is showing up in the debt now?

[The Keystone Garter]

I notice for many of the USA's top public engineering schools, the tuition is $10000/r for in state students and $26000 for out of state. This is inefficient as teenagers aren't generally adapt or financially secure enough to move in state.
There are a number of ways to make this regional, so out of state students can still study in a field at a top university in which they are motivated to excel in. A top biomedical school is in Georgia: why is Mississippi screwed? Georgia pays the public expenses. But certainly there are benefits to housing the school in one's state. Same situation in Cali and Nevada: latter are stuck dealing BJ instead of attending a top materials science school 4 hours away.
There ought to be partially shared costs. For importing nurses from the Philippines into Canada, Canada was considering paying The Philippines some cash for hawking their graduates. Here, if a State like Nevada sends a student to Caltech perhaps Nevada could send California some cash, but not the full $16000 difference as there is an advantage to housing Caltech and the research parks and maybe the graduate's subsequent residence. Right now that $16000 is an incentive for an individual not to go to an out of state school that may have unique faculties his own state college doesn't possess. If the cost were instead $6000-$10000/yr to the State, a future sustainable tax base would be built. Ideally at these low federal interest rates, would be a federal initiative. I dunno about the law here (there I mean).

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