March 26, 2012
To the Queen's community
We are writing at this time to provide the Queen's Community with a financial update, which covers the fiscal year ending April 30, 2012, the preliminary 2012-13 operating budget, and a brief introduction to the new budget model, to be introduced for the 2013-14 budget year. A public forum is being planned for next month to provide more detail about the budget model and the fundamental objectives of changing the way resources are allocated at the university, to invite questions and comments, and to stimulate discussion.
In our October 2011 update, we indicated the Board of Trustees reluctantly approved a deficit of $3M in the operating budget for 2011-12. Several positive factors have influenced our financial position, which we expect to mitigate the budgeted deficit. A quarterly Financial Update Report was presented to the Board of Trustees at the March meeting.
A reduction in required special pension payments based on the results of the August 2011 actuarial valuation of Queen's pension plan is a key contributor to the improved financial results. Plan changes approved by employee groups who negotiated contracts last summer, together with low interest rates, resulted in significant savings on the current year solvency interest. We are also pleased to report that Queen's received approval for Stage 1 solvency relief, confirming our exemption for three years from having to make major payments into the plan to reduce the solvency deficit. We very much appreciate this evidence of the community working collectively to achieve a more stable and secure fiscal operating environment.
We have seen significant progress towards making the Pension Plan viable, but there are additional challenges on the horizon, beginning in September 2015, when we begin making solvency payments in the order of $25 million annually. The most recent credit rating reports provide information on the pension obligations as part of a comprehensive overview of operations.
Other factors that have had a positive influence on our financial picture this year include a warmer winter, lower natural gas prices, and a new contract with the Ontario Power Authority for the co-generation plant, resulting in longer-term utilities savings. Overall student enrolment was slightly above planned levels so tuition and grant revenue were a little higher than forecast, although a significant portion of that revenue is one-time funding for Graduate Accessibility.
These significant positive effects have been partially offset by lower income on the Pooled Investment Fund because of the continuing frailty of financial markets.
The Provost was directed by the Board of Trustees to ensure a balanced operating budget for 2012-13. Budget meetings with all units have been completed as we enter the final stages of the 2012-13 budget process. As reported in the October 2011 Financial Update, 2012-13 operating budget allocations will remain unchanged at 2011-12 levels with no sharing of incremental revenue, and the originally planned across-the-board budget reduction is eliminated. This underlying budget framework applies only to 2012-13; the new budget model will apply to 2013-14 and subsequent years.
There were a number of challenges to balancing the 2012-13 operating budget, including the continued decrease in investment income from the Pooled Investment Fund, a substantial increase in the mandatory Pension Benefit Guarantee Fund payment, and increases in salary and benefit expenses. We also face increased operating costs because of the opening of new buildings. On the positive side, we expect increased revenue from tuition and modest enrolment increases and additional revenue from residence operations and the co-generation facility. Additionally, we are projecting cost savings for utility costs and the recovery of on-going funding commitments for programs that are winding down or have been completed. Very limited reinvestment was possible, with additional funding provided for Human Resources and Internal Audit, and for a director for the Isabel Bader Centre for the Performing Arts.
A number of assumptions with respect to the 2012-13 operating budget create a certain level of risk. Funding for undergraduate and graduate enrolment growth is uncertain, and we await the outcome of negotiations with United Steel Workers. The absence of any central contingency fund to respond to challenges and opportunities as they may arise poses another significant risk to the institution. In spite of these challenges, the 2012-13 budget is balanced, albeit with a draw down of carry-forward funds by several units. It is critical that the university find ways to address financial constraints because we cannot indefinitely rely on carry forward reserves to fund in-year operating deficits. The final 2012-13 budget will be presented to the Board of Trustees in May.
Looking beyond next year we will continue to have unresolved issues with respect to operating within a strictly regulated environment with no long-term tuition framework or enrolment grant commitments, continuing uncertainty about the health of capital markets, no identified source of funding to address our significant deferred maintenance, and the absence of any contingency fund, and, as noted, we still have the looming pension solvency requirement commencing in 2015.
The graph below represents the allocation of resources in the 2012-13 preliminary budget: 62 per cent of budget allocations are allotted to academic faculties, schools and libraries; 19 per cent to shared central services; 8 percent to the Principal's and Vice-Principals' offices; 7 per cent to student assistance; and 4 per cent transferred to to capital expenditures.
Figure 1: Preliminary 2102-13 Budget Allocation
On March 5 representatives and stakeholders from across campus, including deans, business officers, and shared service leaders participated in an initial discussion of Queen's New Budget Model. The over-arching goal of the new budget model process is to provide a systematic framework for the development of an activity-based budget model. This will address widely expressed concerns about the current model, especially the lack of transparency and clarity, and the perception it may not reflect academic goals.
The overriding objectives are a simplified model that makes resource allocation completely transparent, a strong alignment between resource allocation and academic goals, and clear incentives.
The university continues to face significant financial challenges and risks, and the provincial outlook does not provide much room for optimism. We do, however, believe that the new budget model will help us meet our challenges. We look forward to discussing the new budget model with you in April.
Thank you for your interest in Queen's financial situation. Do not hesitate to contact us if you have any questions.
Vice-Principal (Finance and Administration)
Provost and Vice-Principal (Academic)