Principal's Financial Update

November 26, 2009
Robert Sutherland 202, 3pm

Good afternoon.

Thank you for coming and hello to all of you watching in Ellis Hall and at West Campus.

This is my first financial update to the community as Principal.

I'm now almost 3 months into my term, and I have a clear understanding of where we are....Where we are - indeed - is facing serious circumstances.

Our projected operating deficit for this year was $8.3 million - the first time in living memory that Queen's is in a deficit position.

External context...

This occurs in a difficult external context.

• The province will certainly NOT be coming to bail us out with year-end money.
• Government revenues are in freefall; Ontario's deficit is an unprecedented $24.7 billion.
• In Ontario and across the country, the private sector is shedding jobs by the thousands.
• Canada's unemployment rate is 8.6% - the highest it has been in the past 50 years.

Even Kingston, relatively sheltered so far, is likely to experience some difficulty in upcoming years.

Although the financial markets are now looking better, it's going to be a long and slow climb back up to pre-Fall 2008 levels.

While the provincial and federal governments are working to kick-start the economy with infrastructure projects - and Queen's has been awarded millions in capital funding for our medical school building and performing arts centre- there is no government relief in sight for university operating costs.

I continue to press on this, as do my Council of Ontario Universities colleagues, but we are well aware that significant relief is highly unlikely in the foreseeable future.

Over the last decade-and-a-half, we've seen the provincial government's proportion of our operating revenues drop from about 75% to less than half. In the future, I expect that proportion could decline further, considering the state of provincial finances.

As a result of all of this, there are significant and difficult choices to be made here at Queen's, as at most Ontario universities.

At Queen's...

Queen's has an additional financial imperative.

At May's Board of Trustees meeting, the administration proposed a 3-year budget that included annual operating deficits, resulting in a projected $33 million accumulated deficit in 2011-12.

While the Board accepted the 2009-10 deficit budget, it was on the condition that we balance the books by the end of 2011-12.

In other words, we must shrink the annual deficit to zero by April 2012.

We have to do this; this is our mandate from the Board, and it is sound fiscal management.

A balanced budget helps to maintain our top-ranked bond rating, which gives us preferred borrowing rates, which ultimately saves us money.

Balancing the budget by 2012 also means we aren't saddling future generations with a huge accumulated debt.

Components of the current situation...

The causes of our current situation are complex; there are several components.

The carrying costs of debt for capital projects - including the Queen's Centre - are part of this picture. Capital debt is part of our reality, and we are taking steps to minimize its effects.

Last year's market meltdown impacted our endowments. They were budgeted to add $5.4 million to the operating budget this year, but will produce about 20% less.

The recession has also affected fundraising. We continue to work hard on donations, but please remember: most are targeted. People give to specific projects or initiatives, so we can't rely on fundraising to solve our operating budget issues.

The economic downturn exacerbated an already very serious pension crisis. Our unfunded pension liability now requires a $6 million annual payment out of the operating budget.

Finally, compensation - salaries and benefits - is the most significant component.

Compensation costs make up more than 70% of the operating budget. This is consistent with our peer institutions.

So as universities try to reduce their deficits, we all must look at how much salaries can reasonably increase, while everything else is being reduced.

For many years, we have chipped away at the non-compensation portion of the operating budget. This has led us to the state we now find ourselves in - with very little left to cut.

As you all know, many academic units are now threadbare, as they implement the 3-year 15% budget reallocation.

I say reallocation, not cut, because that money is basically covering the costs of current compensation growth.

There will be great pain across campus next year and the year after as we address this reallocation target.

I am very worried that if we do not contain compensation, the quality of our academic program delivery may be further compromised.

Some departments are on the cusp of losing adjuncts. Others, in fact, already have. No doubt, the range of electives available to our students- which has been a key aspect of the Queen's education - will shrink, and class sizes will rise.

This is unacceptable. We have to take another path.

To reiterate, we must curb the growth of our costs across the university, both within and outside the compensation budget.

Progress...

Some very real and positive progress has been made.

We recently signed a 1-year salary and benefits agreement with our staff association.

In accepting a 1.25% scale adjustment as part of a 3% total compensation increase this year, QUSA has shown real leadership.

I want to take the opportunity once again to express my appreciation of staff members' recognition of the financial reality. I am grateful for their dedication to Queen's and their understanding of the current situation.

This salary mitigation is supported by a salary freeze in 2009-10 for senior administration and senior staff. This is making a difference. It's reducing the deficit by $2 million annually.

That's $2 million that we no longer have to take out of academic unit budgets. Over the three years, it means our accumulated deficit is $6 million less than first forecast.

I am hopeful that all employee groups will decide to help alleviate the financial burden we face. This could have quite an impact on our in-year deficits.

I have recently been in contact with local CUPE leaders. I can tell you that they too are concerned about the University's financial situation. I look forward to working with them on exploring possible solutions.

Proposals made to QUFA...

Let me now turn to QUFA...

Our current collective agreement with the faculty association ends in April 2011 - and we will, of course, honour it.

But I wondered if there was anything that could be done in the interim.

I have received numerous emails from faculty members and spoken to many others who are troubled by the financial situation.

Last month, I met with the QUFA executive and presented two proposals:

• First, that the Executive consider restarting discussions on an early retirement plan. They have since agreed, and I look forward to getting that process underway.
  
  We also agreed last week to restart talks on topics including anomalies funds and salary structure. I welcome these discussions.

• Second, I requested that the QUFA Executive consider proposing to its members a 2% reduction in the negotiated salary increase for 2010-2011, with 1% being reallocated back to each faculty member's academic department on a transparent and accountable basis, and the other 1% going to reduce the university's operating budget deficit.

This would have represented a base reallocation to academic units of about $1 million, and it would have reduced the university's operating deficit by another $1 million.

For the Faculty of Arts and Science, this would have meant a reallocation of approximately $500,000, which when redistributed out to departments would have provided some real relief. Even for a small department, this reallocation could have helped to retain an RA or TA whose position might otherwise be lost, or part of a staff position.

It would not have fixed our problem, but it would have gone a significant distance and indicated a real shared approach to finding solutions.

Unfortunately, the Executive declined my request.

This is very disappointing, especially given what I have heard from many individual faculty members who understand that the world has changed since the average 6% annual increases were negotiated last year, and who want to take action to lessen the pain in their units and on the university as a whole.

I am telling you all of this, because I want you to be aware of the University's efforts to explore all options. I have no desire to see academic units struggling to survive.

Next week, I will be reporting to the Board on the status of our talks with employee groups and the impact on the deficit.

On a personal note, I want to tell you that the Board Chair has granted my request to take a 2% salary cut starting January 1st and to forego any salary increase next year.

I've taken this step because I am so concerned by what I see around me, and I feel so strongly about the need to take action.

Additional approaches...

Although salary mitigation strategies will have the biggest impact, we continue to explore additional approaches.

Among other things, we are reviewing all of Queen's property holdings to see what real estate could be sold. I expect to be presenting recommendations to the Board in March.

Departments and faculties must also think outside the box. The Principal's Innovation Fund is supporting projects aimed at reducing costs and/or finding new sources of revenue.

For example, the French department is expanding the French Centre to offer more non-credit courses to help fund their graduate program. Another proposal seeks to introduce 3D mapping of campus buildings to help with space planning and energy efficiency.

I have been greatly encouraged by all of the various cost saving initiatives that have come forward from individual Faculties, Schools and Departments. This is imagination in action and it's something we all need to do.

However it is quite evident that we must also focus on larger University-wide cost savings measures that will benefit us all. These measures will require a new level of cooperation between academic and administrative units, and I am confident we will get there.

Academic planning process and Transition Fund...

The academic planning process that we will be embarking on in the new year will help us prioritize what we do and how we do it. I think it's very important that our academic values drive our financial decisions, including capital planning, budgets and human resources strategies.

The process will start with a Principal's Vision Statement that I'm now writing and will be sharing with the community in January.

This will be followed by a ground-up planning exercise in departments and faculties over the winter term.

Then the Plan itself will be written by a group of academics - not administrators - and will be discussed campus-wide next fall before going to Senate and then the Board in December 2010.

Time, of course, is not our friend while we undertake this planning.

Academic units are facing some fundamental decisions that can't wait 12 months.

There is no doubt that restructuring is needed in some places, but this takes time and sometimes money. To help bridge the gap and allow units to start making necessary changes, I am creating a $1 million Transition Fund.

I'm going to borrow from within to help academic units transform. This is a strategic choice to prepare for long-term change.

I want to be clear: this is money that will have to be paid back. I'm not pulling a rabbit out a hat. To repeat a comment I made to the Arts and Science Faculty Board two weeks ago, there are no rabbits and no hats.

In conclusion...

So in conclusion, this is where we are.

Many of our academic programs are seriously at risk. If we truly value them, we must take action to protect them.

A mix of academic imagination paired with some salary restraint will get us through this rough patch and on to a positive financial path.

We must curb the growth of our costs across the university, both within and outside the compensation budget.

We can succeed if everyone chooses to do their part.

Thank you.

I'd be happy to take questions.

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