Thursday February 26, 2009
Robert Sutherland Hall Room 202
Good afternoon. Thank you for coming.
Today I would like to provide you with an update on the state of the University's finances, the progress we have made, and the challenges that lie ahead.
A lot has happened at Queen's and across the Higher Education sector since my first report to the community on September 25. Substantial work has been done across this campus and we are taking some major steps forward.
I want to thank you all for the efforts you are making, as we work together on a long-term plan to improve Queen's financial situation.
First, a little context - globally, nationally, and provincially, the economic situation remains volatile and uncertain.
Things obviously aren't improving and experts can’t agree when the turnaround will start.
We are certainly not alone.
Our colleagues at other institutions across Ontario are also facing similar difficulties: reduced provincial grants, tumbling endowments, and rising expenses.
At Queen’s, as at other institutions, the operating budget has been under increasing pressure for the past several years.
As you can see [in Figure 1], less and less of our operating budget is covered by provincial funding. This has been the trend over the last 15 years. This trend is unlikely to change.
Provincial funding -- particularly in recent years -- has been primarily tied to enrolment, and we have deliberately chosen not to significantly grow our undergraduate population.
In some ways, this has been positive.
Figure 1. Provincial Funding
Provincial grants are now a lower proportion of Operating Revenue
Our research, reputational and student rankings all prove that we continue to be a top Canadian university.
But our decision to grow more slowly than our peers comes with a price -- our share of the provincial pie is getting smaller.
We've been trying to cover this shortfall through tuition increases and incremental cuts for 11 of the last 15 years. But we simply can't do that any more.
Not only are provincial grants expected to continue to decline, but we’ve been told not to expect the year-end operating funding from Queen’s Park that we’ve received in past years.
You may have heard that the federal government will be providing universities and colleges with $2 billion in infrastructure funding this year to help stimulate the economy.
We're still waiting to see how much Queen's will get -- but of course, everyone must understand: this money is for capital expenditures, like ongoing building maintenance; it cannot be used to fund our operations – things like heating and lighting classrooms, salaries or student support. Capital revenue cannot be converted into operating revenue.
Since April 30, we've seen the value of our endowments drop by at least 22% or $139 million. This money is used mainly for student assistance and academic chairs, but endowments also contribute to the operating budget. Income from this source will continue to fall in the coming years, unless there is a significant economic rebound.
And, the impact of the market meltdown is already affecting donations to the University and will continue to do so.
Some may think that we can simply wait the current situation out – that government funding will eventually increase, and that we’ll look back on this time as a “bad patch”.
I strongly believe that this is not the case. When the economy does rebound, governments will have massive deficits they will need to eliminate. This inevitably will be reflected in constrained annual grants to post secondary education.
Our goal, then, is to get our expenses to meet our revenues – to balance the operating budget.
So let me bring you up to date on what we have been doing over the last few months.
The seven task forces that I struck in the fall to look at key short and long-term issues have made preliminary recommendations.
They are now working on concrete deliverables for July.
Here are some examples:
The Cost Reduction Task Force is planning to launch a new Office Suppliers program that will generate significant savings. We will maximize our purchasing power by using a single supplier, which will get us the lowest price.
The Revenue Generation Task Force is recommending new diploma and certificate programs. We will look at Kingston-region retirees, among others, as a potential new student population.
The Campus Space Task Force is suggesting that we look at how we use space over 12 months, instead of over an academic year. This will help us find new revenue generating activities over the summer months.
Details on the work of the task forces, updates on their progress, as well as frequently asked questions and answers about our financial situation can be found on a special section of my website that was created to keep you all informed about this ongoing issue.
I hope you will visit it often and send me your comments, ideas and feedback at email@example.com.
I am pleased to note that the Canadian Association of University Teachers credits Queen's as being the most advanced in communicating specific steps being taken to deal with the financial situation.
The most difficult element of our financial strategy has been the three-year 15% budget cut across all academic and administrative units.
Through this multi-year budget planning process, the University is examining all of its structures, activities, and programming and making some tough decisions.
Some units aren't filling faculty vacancies, which I know is very painful. Dean Alistair MacLean says that in Arts and Science, he'll need to reduce his faculty by 47 positions over the next three years, in addition to other budget reductions.
Similarly, Applied Science is looking at the need to keep at least five faculty positions unfilled, and Law will not fill two faculty vacancies.
These are some necessary and difficult actions we've had to take.
At the same time, I want to highlight some positive approaches that are being put forward across campus to get us where we need to go.
The Queen's School of Business is exploring innovative program development;
Arts and Science is looking at integrating academic units;
The Faculty of Health Sciences is actively considering restructuring the Basic Medical Science departments;
The Faculty of Education will be increasing revenue with additional marketing and new partnerships. It's also working at making its units financially self-sustaining;
There are discussions across campus of consolidating degrees, programs and course offerings, and
The Faculty of Law is increasing its international law programming at the International Study Centre at Herstmonceux as a revenue generating initiative.
These are just a few examples of some creative thinking, and this work is making a real difference to the financial picture.
Figure 2. Projected Expenditures
This top red line [in Figure 2] shows how high our expenditures would be without the 15% cut. This simply was not sustainable.
The middle blue line shows how the difficult decisions you are making have reduced our spending to move us closer to our goal of a balanced budget….which is the lower black line.
But I must tell you: the 15% cut is not going to be enough.
Figure 3. Projected Accumulated Deficit
Projected Annual and Accumulated Deficits Under Current Budget Planning Assumptions ($000's)
The blue bars [in Figure 3] show that over the next three years, we will be reducing the in-year deficit through the 15% budget cut, bringing us closer to a balanced budget...
...however, this comes at a cost.
We are buying time to get our expenditures in line with our revenues, by spending more than we earn in the first two years, as we adjust.
As the yellow [top] bars show, we will end up with a very large accumulated deficit that we'll have to eliminate. This will lead to additional budget cuts in future years to service the debt.
This graph [Figure 3] is very preliminary: we're still crunching numbers, and we are making every effort to minimize the deficit. But make no mistake - it is a big number.
So, you may be asking -- why aren't we cutting more, faster?
Well, we saw that we couldn't go deeper without doing irreparable damage. We must emerge from this crisis with top-quality offerings, even if we end up with fewer or smaller programs and services.
We needed to build in time to make the changes required to deal with the new fiscal environment.
But I repeat: this three-year planning process comes at a cost.
For the first time in recent history, this institution will be creating deficits which will have to be paid off over time, by further cuts to the operating budget, after the current 3-year plan. So it is in everyone's interest to minimize the size of any deficits we create.
As borrowing rates rise, the cost of carrying this debt will increase, placing more of a burden on the operating budget. This will negatively impact everyone's working conditions, which is something we want to minimize as much as we can.
So what else can we do now, to lessen the financial pain in the future?
Well, let's break down the operating budget:
Figure 4. Operating Budget Expenditures
Student assistance accounts for 9%. We aren't going to touch it.
Much of the work we have been doing - both in the task forces and within all units -- falls within a 21% slice of the budget. For those of you in departmentalized faculties, this is the meager operating budget you have been living on.
As you can see [in Figure 4], what's left is the biggest piece of the pie: salaries and benefits, which account for 70% of the operating budget.
The fact that salaries make up most of an operating budget is entirely normal for most Ontario universities, but it's also limiting, if all we can do is continue to chip away at that 21% of the operating budget.
The Vice Principals, Deans and I have unanimously agreed to freeze our own salaries.
As I've mentioned, some areas are going to keep some faculty positions vacant.
We're going to require executive approval for all faculty hirings, and careful consideration when we look to fill staff positions.
But, I believe that more needs to be done in the area of our overall compensation costs.
We need to look at reducing our salary bill.
The ways that other universities across the continent are starting to do this include: salary freezes, voluntary retirement incentives, and constrained hiring, or some mix of all of the above.
It's time that we look at all of these options, among others.
Let me emphasize that salary agreements with faculty and staff have been negotiated in good faith by management and employee groups over the years. It is a given that any changes to compensation costs must reflect the same dynamic - they must be worked out with representative employee groups.
Now is the time for University and employee representatives to sit down together and explore the possibilities.
For example, if we were to look at reducing annual salary increases: every reduction of 1% -- achieved by any means -- would mean more than $1.5 million in savings for the University. That's significant. It would result in a smaller accumulated deficit, which would be easier to pay down.
If we cannot find mutually agreeable ways to reduce our salary costs quickly, I'm afraid that working conditions will inevitably deteriorate.
I predict we would not be able to maintain current employment levels, including those of adjuncts and TAs.
If we can't reduce our wage costs, there will be a major impact on our teaching and learning environment.
Mitigating salary costs now will result in a lesser long-term impact.
I have been meeting regularly with staff and faculty union leaders to discuss their participation in university-wide cost reduction strategies. And today, I am formally inviting them to work with me on how we might reduce our wage bill. I would like to start this process next week.
I can't emphasize strongly enough: the situation is both serious and pressing. We need quick decisions. Given what we are facing, we simply can't afford to waste any time posturing.
I would hope the result of our serious and fruitful discussions can form part of the final 2009-2010 budget that I will present to the Board of Trustees in May.
I believe this is a necessary step that we can, and must, take together.
I'm confident we will come out the other side stronger than ever.
This University has been around since 1841. We have a long and proud history and we've weathered financial storms before.
The steps we take now to tackle Queen's new financial realities will have a direct and major impact on the choices available to us in the years to come. We must deal with this situation productively, as the strong community we are.
I will keep updating you all on this process, and I would be happy to take your questions now.