Canadian universities, battered by the global financial crisis and the prospect of a prolonged economic downturn, are taking steps to offset steep declines in their endowment earnings and pension funds and are bracing themselves for possible future cuts in government spending.
Some are considering reducing or temporarily eliminating disbursements from endowment funds. They are also delaying construction projects, putting in place temporary hiring and spending freezes, and looking for alternate sources of revenues. Fundraising plans are also sure to be affected.
When global stock prices fell in September and October, that shaved hundreds of millions of dollars off the value of endowment funds, which are made up of charitable donations that are invested, with the income used to pay for scholarships, research chairs and other purposes.
Dan Murray, vice-president, finance, at the University of New Brunswick, said university endowments are well diversified and typically invest about 35 percent of their assets in fixed-income securities and 60 percent in equities. A small portion, he said, is held in alternative instruments such as real estate, infrastructure and hedge funds.
The typical Canadian endowment fund lost 10 percent in September from the start of the year and likely an additional 10 percent in October, he estimated. Some endowment funds were holding investments like asset-backed commercial paper that turned out to be risky in the economic downturn and had to be written off. The University of Calgary wrote off $16.8 million as a result of an investment in asset-backed commercial paper, said its president, Harvey Weingarten.
But generally the losses haven’t been as steep as those suffered by U.S. universities, which typically invest a greater proportion of their endowment funds in equities and alternative instruments, Mr. Murray said.
“There aren’t many investors in the world who managed to do well in this situation,” said Tom Traves, president of Dalhousie University and chair of the Association of Universities and Colleges of Canada. “This is a global economic crisis and everybody is affected by it.”
Ted Garrard, vice-president, external, at the University of Western Ontario, said the losses are steep enough that university endowments could soon have a tough time meeting disbursements. “This is going to start hitting us sooner rather than later,” he said. Western is looking at several measures to make up the drop in its fund, including reducing the level of its payout, temporarily borrowing funds from its operating budget, finding an “angel donor” who would cover the cost of the payout for a year, and using accumulated income in some longstanding funds that hadn’t been previously spent, Mr. Garrard said. Several other universities have also warned that they may reduce or eliminate endowment distributions.
On the fundraising side, Mr. Garrard said he’d started to notice a growing reluctance among donors to contribute as far back as the summer, and since then the trend has accelerated. Donors who were planning to meet multi-year financial commitments with appreciated stock are having trouble doing so. No donor has withdrawn a commitment, he added, but the university has rearranged pledge schedules for a number of them. He predicted universities would see a slowdown in the number of major gifts like those seen in recent years.
Western will go ahead with a campaign to raise $500 million over the next six years despite the market turmoil. But, Mr. Garrard said he expects most of the money will be raised towards the end of the campaign, rather than at the beginning as is usually the case.
Universities also have suffered losses in their pension funds and those with defined-benefit plans – that is, plans that guarantee retirees a set benefit – could face substantial deficits.
Some universities had already reported deficits in their pension valuations before the crisis hit. But even those plans that were in surplus “are likely in a deficit now,” said Paul Forestell, leader of the Canadian Retirement Professional Group at Mercer, a consulting, outsourcing and investment-services firm. Pension plan regulations generally require funds to make up deficits within five years and that, he said, will be “very challenging” for universities and other non-profit organizations with set cash flows.
Defined-benefit plans may have to consider raising contribution rates or adjusting future benefits, said Mr. Forestell. Several large, federally regulated plans have petitioned the federal government for relief from their funding requirements, essentially asking for more time to make up the shortfall, and Ottawa has said it will consider the request.
But university plans are regulated by provincial governments. Mr. Forestell said several provinces, including Ontario, Alberta, British Columbia and Nova Scotia, had been assessing pension regulations before the crisis hit and are awaiting reports by expert commissions. Relief from funding pension obligations has been provided to universities and municipalities by some provinces in the past, for example, by New Brunswick after the high-tech bubble burst in 2000.
“I think universities will be looking, as will any company, to have some flexibility added to the funding rules for defined-benefit plans as a result of what’s happened in the market,” Mr. Forestell said. And, he added, provincial regulators are likely considering such options, although none has said so publicly. He said it makes sense for governments to provide temporary relief to some pension plans when, for example, there is little likelihood of a university shutting its doors and leaving employees without a pension.
Many universities have started to keep a close watch on hiring and spending plans. “We are going to be putting a great deal of oversight and discussion into whether vacancies need to be filled and when they need to be filled,” said Alan Wildeman, president of the University of Windsor. The university’s endowment fund fell about 15 percent in September to $50 million, and the October results will likely be worse, Dr. Wildeman said.
The University of Waterloo has gone a step further, temporarily freezing most hiring and discretionary spending for the remainder of the fiscal year ending April 30, 2009. At a town hall meeting of staff and faculty members, President David Johnston said the measure will give the university a cushion of savings should economic conditions continue to deteriorate. He said the university would do its best to avoid layoffs, but acknowledged that the hiring freeze may lead to slightly larger class sizes and increased faculty teaching loads.
“We simply don’t know how this will play out over the next six to 12 months,” he said in a statement. The university is also looking to boost revenues through more fundraising, increased first-year enrolment, recruiting more foreign students, reducing undergraduate drop-out rates and creating or expanding graduate programs. While the university’s pension fund is safe, he said contribution rates may need to be raised.
Preparing for the crisis
Some universities had begun tightening their belts before the crisis hit. Trent University had eliminated 50 positions and had implemented a hiring freeze this fiscal year. “This means that there will be the need for further restructuring and, quite frankly, we are into the bone,” said President Bonnie Patterson. Trent may freeze spending on some equipment purchases and cut back in other areas.
Raising tuition fees isn’t an option for many universities because several provinces have in place tuition freezes or caps, as in Ontario. Instead, Trent is looking to partner with a private developer who would lease an endowed parcel of land adjacent to the university and use it to build and operate a new student residence. The plan, although contentious, would provide the university with a long-term stable revenue source.
The decline in Trent’s endowment fund hasn’t been as significant as those of some larger institutions. Still, Professor Patterson said a $6-million drop this year means Trent may have to adjust or eliminate its payout, most of which goes to student aid. That could mean as much as $1 million won’t be available for student aid.
Although endowment fund declines have been worrisome, universities are growing increasingly concerned about their largest revenue source: government operating grants. “We are beginning to get signals from government that, at the very best, we may have the same revenue line in the coming year that we’ve had in this current year,” Professor Patterson said. That would translate into a five-percent budget cut at Trent, after inflation. The university has relied on other government grants to avoid a deficit in recent years – grants which may also be in doubt, she said.
Queen’s University, too, had been feeling the pinch. Principal Tom Williams had warned earlier this year that the university could face “a substantial shortfall of revenue versus expenditures” in the 2010 fiscal year unless there were spending reductions or new sources of revenue. In a break with tradition, the university’s board of trustees in October approved a plan to borrow funds, including $180 million in short-term loans from the Ontario government’s infrastructure fund to support several construction projects on campus. The board also approved a policy to consider long-term borrowing plans. While the board’s decision wasn’t directly tied to the financial turmoil, it’s all the more necessary now, said Patrick Deane, vice-president, academic.
Queen’s also held talks with employee groups about how to address the $80-million deficit in its pension fund, and is considering several measures, including adjusting future benefits and possibly opening a defined-contribution plan for new employees, he said.
Some university construction plans have been put on the back burner. The University of New Brunswick will delay some construction projects that were in the early stages of development, said Mr. Murray, vice-president finance. And UNB is looking at each job vacancy “very carefully” before filling it, he said. But UNB has pledged to maintain expenditures on student aid and scholarships.
Universities are expected to feel the impact of the economic slowdown in other ways too. Enrolments typically increase during depressed economic times as students put off looking for work in a weak labour market. “There’s no doubt in my mind we will see an increased demand for spots in universities as a result of this economic downturn,” especially for graduate programs, said University of Calgary’s Dr. Weingarten.
Parents and students may find it tougher to pay for education costs, increasing demand for student loans and bursaries, all at a time when university and government budgets will be severely strained.
“None of us is going to escape the impact of what’s going on out there,” Dr. Weingarten said. But markets may ultimately recover, he observed. And so far the volatility has affected mainly endowment funds, which make up a small percentage of a university’s overall budget – in Calgary’s case, less than two percent. By comparison, during the last economic downturn and period of government retrenchment in the early 1990s, it was government operating grants that were severely pared, he noted.
Could universities be facing a similar situation down the road? “Certainly I worry about that,” said Dr. Traves, chair of AUCC. “My only hope is that people learned some of the lessons of the 1990s, which is that cutting back on educational spending is a short-sighted way of saving money.”