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University forecasts net income of $194.4 million for 2014–2015

The biannual report was presented at a Business Board meeting on January 26
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Simcoe Hall, home to the University of Toronto’s Governing Council. DENIS OSPIOV/THE VARSITY
Simcoe Hall, home to the University of Toronto’s Governing Council. DENIS OSPIOV/THE VARSITY

The University of Toronto is forecast to have a net income of $194.4 million for the 2014–2015 fiscal year, university administration said during last week’s Business Board meeting.

The prediction is based on projections from revenues and expenditures from the university’s operating, ancillary, capital, and restricted funds. It also takes into account the net assets from the beginning to the end of the year, as well as a remeasurement of the pension benefits.

The projection assumes a 7.3 per cent return on the university’s investments. However, even if the return were to be only 3.0 per cent, the university would still expect a net income of $174.2 million.

When asked by the board about the need for the remeasurement of pension benefits, which cost $277 million, Sheila Brown, the university’s chief financial officer, cited longer Canadian life expectancy as the reason to account for these changes in benefits.

“In the case of Canada, studies have been done and found out that we are living longer than we used to and in many cases, longer than we were predicted by actuaries to live,” Brown says, adding, “So a lot of changes have to be made to the longevity assumptions.”

Brown also mentioned that employees in the public sector are estimated to live longer than employees in the private sector.

Last year’s operating fund deficit of $14.5 million is expected to drop to $5.7 million. According to the report, the university’s operating fund had been budgeted to be balanced by the end of this fiscal year. However, the university has received $11.4 million less in government grants than expected.

Debt strategy

A review of the university’s debt also shows that the university’s current debt burden ratio, calculated as the principal plus interest divided by total expenditures, stands at 3.8 per cent — lower than the debt policy limit set at five per cent as part of the new debt strategy put in place in 2012. The ratio is used as an indicator of debt affordability; the lower the ratio, the more affordable the debt.

The current debt strategy was approved in 2012 to account for the need for debt financing while still maintaining appropriate “financial parameters” for the university. According to the debt strategy, the debt policy limit is calculated annually with a debt burden ratio of five per cent, taking into consideration a 0.8 viability ratio, defined as expendable resources divided by total debt.

A 0.8 viability ratio, should it have to do so by the end of the fiscal year, means that the university can pay off 80 per cent of the total outstanding debt.

The university is currently reporting a moderate debt burden ratio of 3.8 and a robust viability ratio of 1.17. Most of the university’s debt is external and 98.7 per cent of it is in debentures, issuing bonds.

These debentures pay out fixed interest rates biannually, with repayment of the principal scheduled for between 2031 and 2051.

A Long-Term Borrowing Pool (LTBP) was created by the university as funds to go towards repayment of the debentures principal. As of April 30, 2014, the LTBP had accumulated $162.2 million towards repaying the $710 million principal.

The review notes that, while the university’s debt burden is high compared to other Canadian universities, it is lower than the median among American universities with the same credit rating.

The debt strategy review was accompanied by a credit report from the credit ratings agency Moody’s. According to the report, the university’s current rating of Aa2 Stable reflects “[its] solid operating performance and operating cash flow generation despite continued operating pressures, a moderate debt burden and strong balance sheet.”

The report also cites pressures such as inflation and provincial regulations limiting annual increases in tuition fees to three per cent, as well as unfunded pension liabilities, as future credit challenges.

The board asked Brown whether the change of outlook of the provincial government’s credit rating would affect the university’s credit outlook. She referred to a report from Moody’s that identified the impact of the province’s negative outlook on institutions that were tied to it. The university was counted among those whose outlook would not be affected by the province’s performance. The board commented that this reflected “the diminishing dependence on the province.”

Boundless outlook

David Palmer, the university’s vice-president, advancement, also presented the annual report on the Boundless campaign at the meeting.

The fundraising campaign was launched in November 2011 with a goal of $2 billion by 2017.

Palmer described the number of alumni being engaged in programming, like the Spring Reunion, student mentorship, and philanthropic support as a “rising tide.” To date, the campaign has raised over $1.5 billion.